Performance criteria used in 28% of SIP plans with free shares


Performance criteria used in 28% of SIP plans with free shares

Performance conditions are becoming much more common among companies operating share incentive plans, according to a survey by Proshare.

Overall, the survey of 308 organisations found that 28% of companies offering free shares link the award of free shares to performance measures.

"Companies may have found it easier to make the case for financing free shares if these are conditional on performance," the Proshare reports says. "Two-fifths of those companies applying performance criteria used group wide results, but there is evidence (in small scale) of a variety of other approaches to measuring performance, including key performance indicators (such as customer satisfaction) and economic value added (which measures the efficacy of a business unit in generating a financial return on the funds invested in it)."

Free shares

The proportion of companies offering free shares has fallen to 31% of companies this year which compares with a figure of 40% in 2003. The most popular eligibility period continues to be 12 months, used by 30% of surveyed companies which offer free shares.

Under the share plan legislation, an employee can be required to give up some or all of their free or matching shares if they leave employment or take the shares out of the plan during a period of time set by the company. This forfeiture period can be up to three years from the date of the award. The company cannot require any shares to be forfeited if an employee leaves "involuntarily" -- so-called "good leavers" whose employment ends through retirement, redundancy, disability and so on. However, a company can have different surrender provisions for different types of "bad leavers" -- for example, employees who resign could be treated differently from those who are dismissed for misconduct. A forfeiture period may be a useful tool for companies wishing to retain employees because it requires them to remain with the organisation if they wish to receive the benefit of the salaries awarded to them under the plan.

Proshare found that 54% of participating companies now have forfeiture conditions for free shares. As many as 81% of these utilise the maximum three-year forfeiture period.

Partnership shares

Partnership shares are still the most popular plan shares with 88% of all plans offering these, down seven percentage points on 2003.

The share incentive plan legislation allows an employee to purchase up to £1,500 worth of partnership shares a year out of his or her salary before tax and NICs are deducted, which reduces the amount of salary on which he or she will have to pay tax and national insurance. No tax or national insurance is payable on the proceeds from the sale of shares if they are kept for at least five years.

According to Proshare, the average monthly savings has fallen from £75.56 in 2003 to £52.71 this year.

Matching shares

Under the legislation, the maximum ratio of matching shares to partnership shares is 2:1. In other words, the company may award up to two matching shares for every partnership share bought by an employee out of his or her salary. The Inland Revenue also allows a company to match up to a fixed level of partnership shares bought, with the balance of partnership shares not attracting a match. No tax or national insurance is due if employees keep their matching shares for at least five years.

Almost half of all SIPs (49%) now offer matching shares and the most common match remains 1:1 (used by a third of companies). The most generous match of 2:1 is used by 20% of companies offering matching shares.

As with free shares, companies with a share incentive plan can require employees to forfeit matching shares if they cease to be employed (without being classed as "good leavers"), or withdraw partnership shares from the plan, within three years of the award date. The Proshare survey indicates that there has been a decline in the proportion of companies using forfeiture, from 77% in 2003 to 65% this year.

What is the share incentive plan?

SIP is a tax-advantaged plan to encourage employees to hold shares in the company or group for which they work. It was introduced in the Finance Act 2000.

The legislation provides for three main types of plan shares to be used:

  • Free shares: Employers can grant employees up to £3,000 worth of free shares each tax year, which can be distributed according to pay, length of service, hours worked, or even linked to performance.
  • Partnership shares: Employees can buy partnership shares out of their pre-tax and pre-national insurance earnings, up to a maximum of £1,500 a year or 10% of salary, if lower.
  • Matching shares: Employers can give matching shares at a ratio of up to two free matching shares for each partnership share bought by the employee.

No tax or national insurance is payable on shares if they are kept for at least five years.

Companies can also allow an employee to use up to £1,500 of dividends from his or her plan shares each year to buy further shares -- called Dividend shares -- in the company through the plan.

It is not necessary for all three types of share to options to be used by a company operating a SIP. Various options for distributing shares under a SIP plan can be used -- for example, free shares only, or partnership with or without matching shares, or another combination to suit the business needs of the company.

Optional features

As well as being able to choose between the different kinds of plan shares to build a plan that suits its business needs, employers can also include other optional features:

  • Eligibility criteria: Companies can prescribe a period of up to 18 months' employment before employees are eligible to participate in a SIP.
  • Performance-related awards: Companies can link the award of free shares to performance measures.
  • Forfeiture: Companies can make employees give up some or all of their free or matching shares if they leave, for certain reasons, within three years of the award date.
  • Holding periods: While free and matching shares must stay in the plan for three years, companies can require employees to hold these in the plan for up to five years. Dividend shares must normally be held for three years.

Further details

For more information about share schemes visit the Inland Revenue web site at

Want to know more?

Title: Share Incentive Plan Survey 2004, Proshare.

Methodology: The survey was based on responses received from 11 SIP administrators, accounting for half of the SIPs that have launched. A total of 308 companies were covered by the survey, with a combined workforce of 2.3 million. The results of the survey do not include SIPs run by other administrators and those that run in-house. Many of these SIPs will be for smaller companies.

Availability: You can download a free copy of the 22-page report when you visit the Proshare web site at

Posted 9 September 2004