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Strategic Finance

Share Plan administration: my place or yours?

Monday, 04 December 2006

Companies at one time or another will have asked themselves whether they should administer their share plans in-house or outsource to a third-party. Lisa O’Connell, Customer Account Manager at myshares, investigates the various factors which should be taken into account when making such a decision In March 2003, Capita Share Plan Services, Abbey National, and Eversheds published the results of their latest All Employee Share Plan Survey, which was designed to analyse the approaches towards employee share ownership within all quoted companies in the UK. Over 80 per cent of respondent companies indicated that they operate an all employee share plan, such as Sharesave or a Share Incentive Plan (SIP), whilst over 20 per cent currently operate a discretionary Company Share Option Plan (CSOP).

At one time or another all of those companies will have asked themselves the same question: should they administer their plans in-house, or would it make more sense to outsource part or all of that administration to a third-party?

This is a complex decision to make, and requires a lot of thought. There are many factors which should be taken into account – it is not simply a question of cost.

What share plans does the company currently operate?

This could be one or a combination of:

Sharesave;
SIP;
CSOP;
Long Term Incentive Plans (LTIP);
Restricted Share Scheme;
Enterprise Management Incentive;
International Share Plans.

Whilst many companies’ plan rules are standard in terms of industry practice and Inland Revenue guidelines, there is a noticeable move towards more creative rule writing. For example, an increasing number of companies are taking advantage of plan rules that allow their CSOPs to invest in tranches, often attaching performance criteria to each tranche. This kind of flexibility means that the plan’s administrator must keep a close eye on progress and be aware of the limitations on a participant’s ability to exercise their options.

What plans does the company intend to implement in the future?

A company that currently offers options only to directors will find that administration is substantially more intensive if it decides to introduce a plan intended to benefit all employees.

As new plans are introduced, the administrator will be required to familiarise themselves with the new rules and administration requirements, and participants will need to be re-educated to ensure that they fully understand their new benefit.

Have the existing share plans been designed to be tax efficient for the participants and the company?

If they have, there will be limits and rules that must be adhered to, and these will differ from country to country. Exceeding limits or breaking rules will invariably lead to some form of penalty for the participant and/or the company.

How many employees participate in the company’s share plans?

Whilst some companies limit their option plans to a small group of directors or managers, others encourage all employees to participate. It may well be easier to administer share plans for small numbers of participants.

How much administration time is devoted to share plans?

Is it a small part of an individual administrator’s role, or is it a full-time job? For example, the finance director or company secretary may count the administration as just one aspect of a much bigger role.
For companies with wide-reaching and active share plans, a dedicated Share Plan administrator may be a better solution.

How does the administrator cope in busy times?

There are certain times in the life of a share plan that require more of an administrator’s time, for example when options are granted or financial reports are being prepared.

Many companies have set procedures in place which can ease the administrative burden, but for those that don’t the administrator may well find themselves overwhelmed by the volume of work.

How does the company communicate with its participants?

In the past communication was often limited to the distribution of option certificates once or twice a year. Today, companies are utilising the technology at their disposal. Whilst many still send out paper copies of option certificates, email is now a very popular communication tool. The introduction of company intranets enables administrators to educate and inform participants, and to disseminate plan information quickly and with the minimum of fuss, for example posting answers to frequently asked questions, exercise documentation, and details of option grants.

Some companies offer a dedicated telephone helpline service and encourage participants to call with their queries. An outsourcer should offer the same service, with calls being answered by people with a good knowledge of individual company’s share plans.

In the current economic climate, with many options underwater, communication can be the key to motivating employees and reminding them of the benefits of share ownership.

Does the company want to maintain total ownership of its’ data in-house?

The views of the company’s board should always be taken into consideration. For example, the CEO may be wary of handing over what they consider to be confidential information, such as salary details, home addresses, and options information.

Alternatively, data could be handed over to an outsourcer. Increasingly, outsourcers are offering co-sourcing services, which means that they will offer assistance on a piecemeal basis, for example producing and distributing option certificates. This would allow the company to maintain ownership of its’ data, whilst taking advantage of a helping hand in busy times.

Speed of response can be crucial: when the auditors want information for financial reports, who is more likely to be able to gather that data in time?

Financial reporting responsibilities are already onerous, but with the introduction of accounting for share-based payments they will become more complex and require the production and manipulation of more data.

What share plan administration infrastructure is in place?

In the past, in-house administrators kept paper-based records. Today, many administrators use spreadsheets, often building in complex formulae to help them police company revenue and institutional investor imposed limits.

However, spreadsheets can become difficult to maintain, particularly when it comes to financial reporting, producing tax returns, or distributing information to plan participants.

Companies and outsourcers can turn to the specialist software packages that are available. Broadly speaking, the same technology is available for both in-house and outsourced administration.

In the UK, there are a number of companies who provide specialised software - either off-the-shelf, or designed specifically for the company’s. Share Plan administration. The software should perform the complex calculations which must be processed if a company is to stay within its company, revenue, and investor imposed limits. It should also facilitate the production of a wide range of reports, designed to assist the administrator throughout the financial year, and be flexible enough to deal with the complexities of the company’s plan rules.

Why does the company operate share plans?

For some companies, share options are a key element of remuneration packages, and are designed to attract and retain the best employees. For others, they are designed to promote share ownership and to align the interests of the participants with those of shareholders. Some companies introduce share plans simply because it seems that everyone else has done so.

Determining the underlying reasons for the operation of share plans can help a company evaluate the level of budget that will be allocated to administration and communication.

What is the cost of in-house administration?

The answer to this question will be dependent on a number of factors, including:

The cost of employing and training an administrator;
The cost of the administration platform, for example the implementation of administration software;
The cost of ongoing communication with participants;
The benefits associated with having direct access to your own data at all times.

What is the cost of outsourcing?

Again, there are a number of factors that must be taken into account:

Annual charges for administration services;
One-off charges for exceptional work;
The amount of time it will take to hand over responsibility for the plans;
The benefits of having experienced and full-time share plan administrators operating the share plans.

The introduction of the International Accounting Standards’ ED2 may well prompt companies to re-evaluate their share plans, and this would seem a good time to take a close look at how those plans are administered. As we have seen, there is more to administration than first meets the eye.

(This article was originally published in Director of Finance 2004 edition)