A listing provides a company with an ideal opportunity to review its employee share incentive arrangements. In many cases, awards granted under a company’s existing share plans will become exercisable at IPO and the plans themselves will be unsuitable for a listed company. A listed company is generally able to offer its employees a wider range of share incentives than one in private ownership. For example, a number of companies find that they are able to offer some of HM Revenue & Customs (HMRC) tax-advantaged share plans that were previously unavailable to them. Such plans can be useful as they potentially offer participants significant tax savings.
Typically, a company embarking on an IPO will consider introducing some or all the following share plans:
- an HMRC tax-advantaged Company Share Option Plan with a schedule for the grant of non-tax-advantaged options on similar terms but above the HMRC limit on tax-advantaged options. This is the “classic” share option plan under which market value options can be granted to selected employees;
- a Long Term Incentive Plan/Performance Share Plan. This is a non-tax advantaged plan that usually provides for the grant of discounted/nil-cost options with challenging performance conditions and is often reserved for the most senior employees;
- an HMRC tax advantaged Savings-Related Share Option Plan. This is a popular all-employee share option plan where participants exercise options (which can be granted at a discount) using amounts deducted from salary and saved in a special account over a set period of time; and/or
- an HMRC tax-advantaged Share Incentive Plan. This is another all-employee plan but here individuals own the shares from the outset. The shares can be awarded for free or purchased from pre-tax salary and are then held for participants within a designated trust for a period of time.
Many listed companies also establish an employee benefit trust to assist with the administration/ operation of their share plans. Often these trusts are established offshore. Provided it meets the necessary conditions, a listed company might still be in a position to offer tax favoured options known as Enterprise Management Incentives.
Some companies choose to give their employees an opportunity to acquire shares in the IPO through an employee share offer. Other possible arrangements include restricted share plans under which senior executives can be granted nil cost options without performance conditions and plans where shares are owned jointly between participants and a third party such as a trust. Some bonus arrangements (especially those for more senior executives) will require a proportion of the bonus to be deferred into shares.
Companies need to consider their share incentive arrangements at an early stage (at least three months prior to the planned date of the IPO). If the schemes can be established before the IPO then not only is this administratively less cumbersome, it can also enable awards to be made using the price at which the company’s shares are first listed. Where the company wants to use the float price for the grant of share awards this often needs to be agreed with HMRC which can take several weeks.
It is important that a company takes into account the likely views of its investors and future investors when devising its share schemes. Shareholders will generally expect there to be limits on the number of shares that can be issued under employee incentives (such as those set out in the Investment Association’s Principles of Remuneration) and, particularly where generous pay-outs are at stake, shareholders will require awards to be subject to the satisfaction of challenging performance criteria.
Wherever trustees or share plan administrators need to be appointed to operate share plans this must be factored into the IPO timetable.
For more information on the types of share plans a company preparing for an IPO might like to consider, please ask for our booklet “Share Incentives for Listed Companies”.