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Ensuring your employee share plan runs smoothly

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“Thankfully, employee share plans are not yet the regulatory minefield that other areas of compensation and benefits have become, but regulation in the area should still be taken seriously,” argues Janet Cooper, partner at Linklaters law firm and global head of employee incentives.


Share plans can be complicated to administer, and to avoid costly pitfalls companies need to ensure that plans’ administrators have the training to spot issues before they become problems.

Share plans are affected by a myriad of rules which administrators must be aware of: tax, securities, corporate governance investment services, employment, trusts, accounting and more. Here are a few areas where companies have been caught out:

Tax compliance
Tax may seem a periphery concern to HR but employee share plans raise some particularly prickly tax issues. A recent case is a good illustration: a major UK retailer has taken legal action against a former chief executive and other former directors to recover £millions in tax on their share options that it should have withheld when they exercised their options but did not. In the circumstances, it was an easy mistake to make but the issue is now in the public eye.

Options back-dating
The business world in the US has been transfixed by the options backdating scandal. More than 200 companies are being investigated, many of whom have been forced to restate their accounts, resulting in hits to share prices and litigation by shareholders.

The US companies involved are alleged to have picked the date on which options were treated as granted after the event to secure better returns for executives and employees. Arguably, this was not itself illegal but problems arose because the reporting of the grants at the end of the year was probably in breach of accounting rules.

The allegations are widespread and suggest insufficient control of procedures and a lack of communication between the various people who understood the legal, tax, securities and corporate governance ramifications of what was being done.

Backdating was common practice among US companies. In other words, without due care, there is no telling which bit of our current common practice might precipitate the next scandal over here.

Corporate governance best practice
UK companies must now disclose details of directors’ remuneration and interests under employee share plans to shareholders every year and put their policy to the vote. This automatically places share plans under public scrutiny every year.

Best practice on the remuneration of directors and senior executives has been developing rapidly over the last few years with the consequence that what is and is not acceptable changes all the time. Companies that do not keep abreast of the latest best practice risk the humiliation of their remuneration policy being voted down. (Even a vote of more than 20 per cent against is regarded as an embarrassment.)

Companies wishing to avoid this need to stay focussed on the constantly shifting goalposts of best practice with regular training and ensure their employee share programme shoots squarely between them.

Age discrimination
The UK and several other EU countries have recently introduced new rules prohibiting age discrimination. Many share plans will subtly breach these rules which could result in claims for unlimited damages by large groups of employees, for example, young workers might claim group compensation for the fact that retirement provisions in the share plans treat older workers more favourably.

Ignoring the local
Well drafted share plans are easy to read and, in many cases, should not require the assistance of a lawyer to interpret. But in some countries there will be legal rules which mean that, in spite of the clear wording of your share plan rules, things do not happen as you would expect. Here are two continental examples which show that you cannot operate plans in the same way the world over:

  • In Denmark, there are rules that will override the normal rules that options or award lapse when an employee is dismissed in some situations.
  • Similarly in Spain, local labour laws being developed in the Spanish courts are giving extra rights to workers than specified in the share plans themselves.
  • Ignoring the global
    The other side of the same coin is that some head offices give too much independence to their local businesses. Local HR or tax will set up a new plan offering the parent company’s shares – but based on local legislation. This might work fine on a day-to-day basis but local rules may ignore the particular legal issues which face the foreign parent company in relation to takeover rules; requirements for shareholder approval for the local plan; and return of capital issues.

    How do companies keep on top of these issues and whatever may be tomorrow’s issues? The complexity and diversity of the issues affecting employee share plans is such that it can’t safely be left to generalists. For specialist training, see www.linklatersicsa.co.uk/ or call Janet Cooper on 020 7456 2000.

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