Andrew Hubbard

Written by: Andrew Hubbard

Andrew Hubbard


Big jump in the number of companies offering EMI share options

Governments of all political persuasions have taken the view that employee share ownership is a 'good thing' and over the years a bewildering variety of share schemes have been introduced with the aim of allowing employees to acquire shares without triggering an income tax charge. 

The latest figures give a good snapshot of the current health of employee participation. If we look first at schemes which are open to all employees we see that the number of companies actively making awards is surprisingly low - well under 1,000. 

This figure has been fairly constant for the last decade and the total number of employees exercising options has in fact declined. A number of household-name companies operate these schemes very successfully and employees lucky enough to work for such a business have been able to enjoy relatively modest gains (typically in the low thousands) from participating. But it is the same companies year after year which are operating them and there is no evidence that there is a significant number of new companies looking to introduce these schemes. 

If we look at schemes where employers can offer incentives only to a selected group of employees the picture is very different. The main scheme here is the Enterprise Management Incentive, which allows options over shares with a value of up to £250,000 to be offered to employees without triggering an income tax charge and (in most cases) offering a favourable CGT rate on disposal. 

EMI has become more and more popular and last year there was big jump - from 2,860 to 3,500 - in the number of companies operating schemes. The average value of shares over which options is granted is much higher (18,500) than for all employee schemes. 

Perhaps the most interesting figure is the contrast between the number of employees being granted options and those exercising them. If we look at trends on a year-on-year basis we see that only about a quarter of employees who are granted options actually exercise them.

Why is this? EMI options are almost always linked to an exit event, typically the sale of a company, and so if this doesn’t happen the options will remain unexercised. So the figures do show that EMI is working. Companies want to incentivise key employees with the prospect of realising considerable wealth if the company is successful, but don’t guarantee to deliver a favourable outcome.

So what is the health of employee share incentives generally? Two groups of people are well catered for. First, employees of a relatively small number of large (almost all quoted) companies who have operated schemes for many years, and second a small number of senior employees in unquoted companies with good prospects for growth.

But individuals not in one of these two categories - ie the vast majority of the UK workforce - are unlikely to have the opportunity to enjoy equity participation in their employer.  Perhaps it is time for the government to think about ways of incentivising the excluded middle.

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