It was recently in the news that BT Group plc staff shared a "£1.1 billion pay-out" from an employee share scheme. Could other companies set up their own share scheme to deliver high levels of reward for strong performance?
Recent reports of BT Group plc (LON:BT.A) staff sharing a "£1.1 billion pay-out" from an employee share scheme might have raised a few eyebrows among many readers. The reports claimed that nearly 23,000 BT employees had received, at the end of a five year period, payments worth an average of £49,000. Could other companies set up their own share scheme to deliver high levels of reward for strong performance?
The scheme was what is known as a savings-related (or SAYE) option scheme, a tax-advantaged employee scheme open to all employees with a minimum level of service. Employees who chose to participate contributed up to £250 per month over a period of five years. The savings were then used to purchase shares at the end of the savings period at a price which was fixed at the start (which was 20% less than market value at that time).
In BT’s case, the purchase price per share was set in 2009 at 61 pence (when the market price was 75 pence) and the shares were purchased in July 2014 when they were worth 388.5 pence per share (a notional gain of over 500%).
A key benefit of the scheme is that no tax liability arises until the shares are sold, at which point capital gains tax might be payable, depending on personal circumstances.
This sounds almost too good to be true, and the levels of employee reward are certainly not typical. Potential gains depend on the performance of the shares in the company concerned. In this case, the BT employees were fortunate that the purchase price was set at a time when the company’s share price was at its lowest point for many years.
If the savings period had instead been 2004-2009 rather than 2009-2014, there would have been no pay-out at all, since the BT share price in 2009 was below that in 2004.
This is, therefore, a scheme which probably works best if offered on a regular basis. If the 20% discount is applied, there will still be a notional gain even if the share price falls (as long as the decline is less than 20%). If there is not even a notional gain, employees can choose to keep their savings rather than spend them on shares, so they do not suffer a loss. Some cycles will be disappointing but others could produce a decent return.
The rewards for BT employees may have been unusually high, but most UK companies – of whatever size and whether private or listed – can use similar arrangements for their own employees. As well as the SAYE scheme that has worked so well at BT, there are other share schemes with statutory tax advantages. Employees can enjoy tax relief on buying shares in their company or receive shares tax-free, and with CGT-free growth.
Alternatively, selected key employees can be granted options without being required to save, with any eventual gain being taxed at 10% (EMI options).
The Government is supportive of wider share ownership, believing it to be beneficial to the UK economy as a whole, a view supported by a range of research. The 2014 Finance Act contains two new tax incentives intended to encourage more companies to introduce employee ownership. Under the first, those who transfer a controlling interest in their company to an employees’ trust can be entirely exempt from CGT. Under the second, a company majority-owned by an employees’ trust will be able to pay bonuses to employees free of income tax.
The UK Employee Share Ownership Index (EOI) measures the share price performance of FTSE-All Share companies in which employees own at least 3% of the equity. During 2013, shares in the 69 companies which satisfied this ownership condition produced an average total return (share price plus dividends) of 53.3% as against an average total return of 20.9% achieved by the other 623 companies in the All-Share index.
While some share schemes, such as BT’s, might hit the headlines simply because of the size of reward, on a wider front, the Government has now added two major new incentives designed to help more companies glean the benefits that can flow from employee ownership.