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Growth in use of share incentive plans

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Growth in use of share incentive plans

The number of UK companies introducing share incentive plans (SIPs) doubled between October 2001 and July 2002, according to a survey by Proshare.

The biggest growth has been in quoted companies outside the FTSE 350 and in the UK subsidiaries of foreign-owned companies.

Slowdown forecast

There are some telltale signs that SIP "may be beginning to run out of steam". As Proshare points out, the decline in the take-up of partnership shares by employees from 46% to 34% is significant. Diane Hay, Proshare's chief executive, said: "It may well reflect current consumer confidence in the stock market or less money to save generally. It may however also reflect a growing reluctance to tie up money in share for five years in order to obtain the full tax and national insurance benefits."

What is the share incentive plan?

SIP is a tax-advantaged plan to encourage employees to hold shares in the company or group for which they work. It was introduced in the Finance Act 2000.

The legislation provides for three main types of plan shares to be used:

  • Free shares: Employers can give employees free shares worth up to £3,000 each tax year, which can be distributed according to pay, length of service, hours worked, or even linked to performance.
  • Partnership shares: Worth up to £125 a month or 10% of salary, if lower, which employees can purchase out of pre-tax and pre-national insurance earnings.
  • Matching shares: Employers can give matching shares at a ratio of up to two matching shares for each partnership share bought by the employee.

Companies can also allow an employee to use up to £1,500 of dividends from his or her plan shares each year to buy further shares - called Dividend shares - in the company through the plan.

Various combinations of types of plan can be used - for example, free shares only, or partnership with or without matching shares, or another combination to suit the business needs of the company.

For more information visit the Inland Revenue web site at www.inlandrevenue.gov.uk/shareschemes

Key survey results

Among the main findings of the Proshare survey are:

  • The most popular type of plan are SIPs that offer solely partnership shares (representing 20.2% of the plans surveyed), followed by those that offer all four type of share (14.6%).
  • Partnership shares are still the most popular plan shares with 84% of all plans offering these.
  • As many as 45% of the companies participating in the survey offer free shares and take-up by employees has increased to 87% from 78% in 2001. Performance criteria were used in 12% of plans - almost entirely based on company or group level results.
  • Nearly half of all SIPs offer matching shares and the most common match remains 1:1.

Sharesave continues to flourish

A number of tax experts suspected that the introduction of the new-style share plan would signal the end for SAYE schemes. As Diane Hay points out: "The continued importance of sharesave - with just under 1,200 schemes today - plus the steady growth of SIP plans demonstrate that they are not in competition and are largely complementary. The impressive take-up of SIP plans by smaller quoted and unlisted companies and by UK subsidiaries of foreign-owned companies fills a gap that was never occupied by sharesave."

Want to know more?

Title: Share Incentive Plan Survey, Autumn 2002, Proshare.

Methodology: Share incentive plan administrators were asked to complete a confidential questionnaire detailing each SIP that they administer. The results of the survey are based on information provided to Proshare in October 2001 and July 2002.

Survey sample: Responses were received from 11 SIP administrators, accounting for over 75% of the externally administered market. The results of the survey do not therefore include SIPs run by other administrators and those that run in-house. Many of these SIPs will be for smaller companies.

Availability: Contact Julia Memery at Proshare, tel: 020 7220 1768, email: julia.memery@proshare.org

To find out more about Proshare visit www.proshare.org