What is a Share Incentive Scheme?
A share incentive scheme (SIS) is a program established by companies to reward employees with shares of the company’s stock based on the achievement of specific performance criteria. These schemes aim to align the interests of employees with those of shareholders, promoting ownership, long-term commitment, and enhanced performance.
Examples of Share Incentive Schemes
- Employee Share Ownership Plan (ESOP): A program that allows employees to acquire company shares, often at a discounted rate or through matching contributions.
- Enterprise Management Incentives (EMI): A targeted share option scheme aimed at smaller companies to attract and retain high-caliber employees by offering tax-efficient share options.
- Savings Related Share Option Scheme (SAYE): Employees save a regular amount from their salary over a period, at the end of which they can use the savings to buy shares in the company at a pre-agreed price.
- Restricted Stock Units (RSUs): Shares given to employees that only vest after certain conditions are met, such as continued employment over a set period or achievement of performance goals.
Frequently Asked Questions (FAQs)
What are the benefits of a share incentive scheme for employees?
Employees benefit from potential capital gains on shares, alignment with company success, and a sense of ownership and belonging within the company.
How does a share incentive scheme benefit the employer?
Employers gain motivated and loyal employees, improved performance, and retention of talent, which helps in driving the overall success of the company.
Are there tax implications for share incentive schemes?
Yes, there are often favorable tax treatments for specific schemes, but the details vary by jurisdiction. For instance, EMI schemes in the UK offer incentives with tax advantages.
Can all employees participate in a share incentive scheme?
Participation is typically contingent on meeting performance criteria or being a full-time employee. Some schemes may be restricted to certain positions or levels within the company.
What happens to shares if an employee leaves the company?
The treatment of shares when an employee leaves can vary. In many cases, unvested shares may be forfeited, and there may be buy-back clauses for vested shares.
Related Terms and Definitions
- Employee Share Ownership Plan (ESOP): A program facilitating employee ownership, providing shares directly or allowing purchase through payroll deductions.
- Employee Share Ownership Trust (ESOT): A trust used to facilitate employee share ownership plans, holding shares on behalf of employees.
- Enterprise Management Incentives (EMI): Share options provided to key employees within smaller companies as a tax-efficient means of compensation.
- Restricted Stock Units (RSUs): Shares granted to employees but subject to vesting conditions.
- Savings Related Share Option Scheme (SAYE): A scheme where employees save regularly over time and ultimately acquire shares at a discounted price.
- Share Option: A financial instrument giving employees the right to purchase a company’s stock at a predetermined price.
Online Resources
Suggested Books for Further Studies
- “Employee Share Ownership Plans: How to Design and Implement an ESOP in Canada” by The Canadian ESOP Association
- “Employee Stock Ownership Plans (ESOPs): An Expert Overview of Employee Stock Ownership Plans” by Nicholas L. Oleson
- “The Ultimate Guide to Employee Stock Options: Elite Edition” by Scott Ford
Accounting Basics: “Share Incentive Scheme” Fundamentals Quiz
### What is the primary purpose of a share incentive scheme?
- [ ] To avoid paying cash bonuses to employees.
- [ ] To reduce company expenses.
- [x] To align employee interests with those of shareholders.
- [ ] To allow employees to control the company.
> **Explanation:** The primary purpose of a share incentive scheme is to align the interests of employees with those of the shareholders, fostering a sense of ownership and motivation.
### Which type of scheme typically involves saving over time to purchase shares at a discounted price?
- [x] Savings Related Share Option Scheme (SAYE)
- [ ] Enterprise Management Incentives (EMI)
- [ ] Restricted Stock Units (RSUs)
- [ ] Employee Ownership Trust (ESOT)
> **Explanation:** The Savings Related Share Option Scheme (SAYE) involves employees saving regularly over a set period before acquiring shares at a discounted pre-agreed price.
### What does EMI stand for in the context of share incentive schemes?
- [ ] Employee Management Incentive
- [x] Enterprise Management Incentives
- [ ] Equity Management Incubators
- [ ] Essential Management Incentives
> **Explanation:** EMI stands for Enterprise Management Incentives, which is a share option scheme aimed at smaller companies to attract and retain high-caliber employees with tax-efficient share options.
### Who are the primary beneficiaries of restricted stock units (RSUs)?
- [ ] All company vendors
- [ ] The general public
- [ ] Part-time employees
- [x] Employees, often specific high-performing or key personnel
> **Explanation:** Restricted Stock Units (RSUs) are typically granted to employees, particularly high-performing or key personnel, and are subject to specific vesting conditions.
### What happens to unvested shares if an employee leaves the company?
- [x] They are typically forfeited.
- [ ] They are automatically vested.
- [ ] They are transferred to another employee.
- [ ] They are given to shareholders.
> **Explanation:** Unvested shares are typically forfeited if an employee leaves the company before they meet the conditions necessary for vesting.
### What is the main tax advantage of an EMI scheme?
- [x] Tax-efficient share options for smaller companies.
- [ ] No tax on bought shares.
- [ ] No need for compliance reporting.
- [ ] Tax-free cash bonuses.
> **Explanation:** The main tax advantage of an EMI scheme is that it offers tax-efficient share options specifically designed for smaller companies.
### Which scheme typically involves granting shares that require fulfillment of certain conditions like tenure or performance?
- [ ] ESOT
- [ ] SAYE
- [x] RSUs
- [ ] ESOP
> **Explanation:** Restricted Stock Units (RSUs) involve granting shares that only become vested after certain conditions such as tenure or performance are met.
### Why might a company implement a share incentive scheme?
- [x] To motivate and retain employees by offering them an ownership stake.
- [ ] To increase immediate revenue.
- [ ] To avoid regulatory scrutiny.
- [ ] To reduce the number of shareholders.
> **Explanation:** Companies implement share incentive schemes primarily to motivate and retain employees by providing them with an ownership stake, aligning their interests with the company's success.
### Are employees required to pay for shares received under an ESOP?
- [ ] Generally, yes.
- [x] Generally, no; shares are given directly or through contribution matching.
- [ ] Always, when using payroll deductions.
- [ ] Only with part-time employment.
> **Explanation:** In an Employee Share Ownership Plan (ESOP), shares are generally given directly or through matching contributions, without requiring employees to pay for them explicitly.
### What specific criteria must employees meet to participate in most share incentive schemes?
- [x] Performance targets or job tenure.
- [ ] Specific college degrees.
- [ ] Personal use of products.
- [ ] Public endorsements.
> **Explanation:** Employees typically must meet specific performance targets or have a certain job tenure to participate in most share incentive schemes.
Thank you for diving into the essential aspects of share incentive schemes and challenging yourself with our detailed quiz questions. Continue to enhance your financial acumen!
