FINANCIAL PARTICIPATION
Use of forfeiture increasing in SIP plans
Forfeiture conditions are becoming much more common among companies operating share incentive plans, according to a survey by Proshare.
Most companies are opting for the maximum three-year period. Overall, the survey of 243 organisations found that the most popular type of plan offered is partnership and matching shares, with 19% of companies offering this combination.
Free shares
The proportion of companies offering free shares has fallen to 40% of companies this year which compares with a figure of 45% in 2002. Performance criteria were used in 11% of plans. Among these, three out of five used a group-wide criteria.
Under the share plan legislation, an employee can be required to give up some or all of their free or matching shares if they leave employment or take the shares out of the plan during a period of time set by the company. This forfeiture period can be up to three years from the date of the award. The company cannot require any shares to be forfeited if an employee leaves "involuntarily" -- so-called "good leavers" whose employment ends through retirement, redundancy, disability and so on. However, a company can have different surrender provisions for different types of "bad leavers" -- for example, employees who resign could be treated differently from those who are dismissed for misconduct. A forfeiture period may be a useful tool for companies wishing to retain employees because it requires them to remain with the organisation if they wish to receive the benefit of the salaries awarded to them under the plan.
Proshare found that 78% of participating companies now have forfeiture conditions for free shares. As many as 60% of these utilise the maximum three-year forfeiture period.
Partnership shares
Partnership shares are still the most popular plan shares with 95% of all plans offering these, up ten percentage points on 2002.
The share incentive plan legislation allows an employee to purchase up to £1,500 worth of partnership shares a year out of his or her salary before tax and NICs are deducted, which reduces the amount of salary on which he or she will have to pay tax and national insurance. No tax or national insurance is payable on the proceeds from the sale of shares if they are kept for at least five years.
According to Proshare, the average monthly savings has risen slightly from £73.70 in 2002 to £75.56 this year.
Matching shares
Under the legislation, the maximum ratio of matching shares to partnership shares is 2:1. In other words, the company may award up to two matching shares for every partnership share bought by an employee out of his or her salary. The Inland Revenue also allows a company to match up to a fixed level of partnership shares bought, with the balance of partnership shares not attracting a match. No tax or national insurance is due if employees keep their matching shares for at least five years.
More than half of all SIPs now offer matching shares and the most common match remains 1:1 (used by 33.6% of companies). The most generous match of 2:1 is used by 16% of companies offering matching shares.
As with free shares, companies with a share incentive plan can require employees to forfeit matching shares if they cease to be employed (without being classed as "good leavers"), or withdraw partnership shares from the plan, within three years of the award date. The Proshare survey indicates that there has been a "noticeable" rise in companies using forfeiture, from 71% in 2002 to 77% this year.
| 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:
No tax or national insurance is payable on shares if they are kept for at least five years. 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. It is not necessary for all three types of share to options to be used by a company operating a SIP. Various options for distributing shares under a SIP 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. |
| Further details For more information about share schemes visit the Inland Revenue web site at www.inlandrevenue.gov.uk/shareschemes/index.htm |
Want to know more?
Title: Share Incentive Plan Survey 2003, Proshare.
Methodology: The survey was based on responses received from 11 SIP administrators, accounting for some two-thirds of the SIPs that have launched. A total of 243 companies were included in the survey. The results of the survey do not include SIPs run by other administrators and those that run in-house. Many of these SIPs will be for smaller companies.
Availability: You can download a free copy of the 24-page report in PDF format when you visit the Proshare web site at www.proshare.org
Posted 21 November 2003