Share Incentive Plan Myths Busted

RM2, the employee ownership and share schemes specialist firm which supports clients with the design and implementation of Share Incentive Plans (SIP), explores and counters some of the most persistent myths about how SIPs work.

The article addresses common misunderstandings common to both private and smaller listed companies that operate this tax-efficient all-employee share plan.

Myth 1: The SIP is only for listed companies

While a SIP is popular with listed companies, we advise and administer many for private companies. In fact, a SIP can be particularly valuable for private companies because it not only incentivises all employees, but it can provide a market for shares, especially when employees leave. A SIP can also help with succession planning, helping founders transition ownership gradually while maintaining business continuity.

Myth 2: The SIP is only for big companies

A SIP is effective for businesses of all sizes, across all sectors. Small and medium-sized enterprises are increasingly using a SIP to help recruit for top talent and foster a greater sense of employee engagement. There’s no minimum company size requirement, making them accessible whether you employ 10 people or 10,000 and the flexibility means you can start small, then grow the scheme as your business expands.

Myth 3: You can’t value private company shares

We can help determine appropriate valuations using established valuation approaches and with our support have a value agreed with HMRC’s Shares and Assets Valuation team for periods of up to six months and this makes SIPs entirely viable for unlisted companies.

Myth 4: I’ll have to give the same number of shares to all employees

Although a SIP is an all-employee plan, which means the company must make the plan available to all employees in the business, you have considerable flexibility in allocation. Free shares must be offered on ‘similar terms’, but you can differentiate based on objective criteria such as salary, length of service, hours worked, or performance metrics – all of which means that you don’t have to give everyone the same number of shares.

Myth 5: If I give away shares, I’ll lose control of my business

You will maintain control in several ways. First, SIP shares can be non-voting if your Articles of Association allow it. Secondly, you decide when to award shares, keeping within the annual limits allowed per employee of £3,600 for free shares and £1,800 for partnership shares and £3,600 for matching shares. And finally, you can include provisions requiring that employees must offer their shares for sale if they leave the business, helping you manage the shareholder register.

Myth 6: The SIP trustees will make awards without my knowledge

The company controls the number of shares to be awarded and when. Trustees administer the scheme and hold shares on behalf of employees and look after their interests. The company decides the award schedule, eligibility criteria and share quantities within the statutory framework, which means you remain firmly in the driving seat.

Myth 7: It’s really expensive to run a SIP

While there are costs involved in setting up and administering a SIP, these are often offset by the significant benefits it typically delivers. Corporation tax relief is available on free and matching shares. The costs are predictable and manageable, especially when you consider the numerous advantages:

·        improved employee recruitment and retention

·        enhanced engagement and productivity

·        a motivated workforce with a stake in the company’s success.

Many businesses find that the return on investment exceeds the administrative costs.

Myth 8: SIPs are too complicated and bureaucratic

While SIPs do require proper administration to maintain their tax-advantaged status, professional administrators like RM2 handle all of the complexity for you. Modern online portals make employee participation straightforward, and our trustees manage HMRC compliance.

Once established, a well-run SIP delivers the recognised advantages, whilst operating smoothly without consuming management time.

Contact RM2 here