Share Incentive Plans (SIPs) - how they work

February 10, 2020 |



 

Sharesave (SAYE) schemes are of great benefit to both you and your employees. Sharesave schemes keep employees more motivated than traditional compensation plans, and ensure those employees have the same goals as management. Sharesaves also create a more positive company culture and reduce employee turnover. Not to mention – these schemes are the most tax efficient way to compensate your employees.

But there’s another employee share scheme that provides exactly the same benefits – a Share Incentive Plan (SIP).

 

What’s a SIP?

In a SIP, an employee makes monthly deductions from their paycheck of a fixed amount they choose. The company then uses those monthly deductions to purchase shares for the participant. SIPs generally last for five years, at which point the employees can receive their profit without tax – or at least, a much smaller tax burden.

 

What are the employee benefits?

The benefits to the employee are immense. The monthly deductions from their payroll come from their pre-tax earnings. Depending on the jurisdiction, and the participant’s tax bracket – this could mean that when they purchase their shares, they receive an effective discount of up to 40%... or more.

Most companies offer matching shares. This means that, for example, for every ten shares you purchase through the SIP, the company gives you an extra one – free. In some companies, the ratio is even better. And there are companies that offer free shares – these are, well, free shares. But they’re tied to performance targets rather than to timelines or deductions.

And then there are the dividends. Every year, the company receives a dividend – it’s essentially interest. The company can distribute this back into the plan, giving participants extra shares, or maybe cash.

Naturally – when you start adding up all these features, the benefits of a SIP to employees are clear. But what about the benefits to employers?

 

Benefits to the company

With all those benefits for employees, you might be wondering how there can still be benefits to the employer. That’s the great thing about employee share schemes – they’re a win-win.

The costs of launching and operating the scheme are tax-deductible. Likewise for the costs of the matching and free shares.

SIPs are also very flexible plans. You can combine rewarding loyalty (length of plan) with rewarding performance (free shares). That way, you can be sure your plan brings out the best in your employees.

 

Things to consider

By this point, you might be thinking – well, that all sounds great! But before you rush off and start implementing a SIP for your company, you need to keep a few things in mind when you’re designing it.

You need to make sure that you balance the needs of the company – long term employee retention – with designing a plan that employees actually want to join. A lot of companies offer SIPs for five years, but you might want to consider a plan of three years (if your jurisdictions allows it). At a time when the average employee stays with a company for two years, three years is already an improvement. Besides, not many people want to tie themselves down to a financial investment for five years, no matter how much they like their job.

Along with this, you need to consider what features your plan is going to offer to employees. Are you going to offer matching shares and free shares? It’s possible to not offer any – and the employees will still be making a smart, pre-tax investment – but these extra shares make the plan far more attractive. And what are you going to do with the annual dividends? The answers to these questions will be different for every company, but it’s important to consider each one based on how it makes your plan more attractive to employees.

 

Are SIPs risky?

This is the main difference between a SIP and a Sharesave scheme – SIPs do involve risk. Because the participants receive shares at the end of the plan, and cannot simply take their savings pot back, there is more risk.

However, the many benefits to employees – the investment comes from pre-tax earnings, the matching and free shares, and the dividends – generally offsets the risks, even if the share price has dropped. It’s important that both the risk and the ways a SIP offsets this risk are communicated effectively to participants.

 

A SIP can help your company get to the next level – let Global Shares help you bring out the best in your plan. Contact us, to see what our award-winning equity compensation software and support can do for you today.

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