Giving staff stock options and, if offered them, choosing whether to accept them, may not be as straightforward as they at first seem. So, here’s some thoughts on when to grab stock options, what to avoid and how to benefit:
1. It’s free money – of a sort
If you’re offered stock options, take a hard look. Some have real potential to generate long-term riches, though you often have to wait several years before a stock option ‘vests’.
That’s the waiting time before a stock is sold or transferred to you. Some plans are far riskier than others - as we’ll see.
2. Don’t sniff at tax sweeteners
Not all have tax benefits, but some do. The Inland Revenue has a number of tax-efficient approved plans you may be eligible for: SIP, SAYE, CSOP and EMI.
- The first two schemes, SIP (Share Incentive Plan) and SAYE (Save As You Earn), tend to be used by larger organisations and contain income tax and national insurance tax breaks
- CSOP (Company Share Option Plan) and EMI (Enterprise Management Incentive) are more discretionary. They’re still treated considerably more positively by HMRC than non-approved share option schemes
- CSOP allows up to £30,000 per employee; the EMI scheme extends to £250,000 of market value. Be aware there are tight strings attached. For example, employees must work for the company 75% of their working time
3. Risk free – up to a point
Some schemes, such as SAYE, allow you to buy into your employer’s shares at discount. If the share price rises, great. And if the share price falls you still get your money back.
The only disadvantage is if the company’s share price fails to rise at all. Your money could be working rather harder elsewhere.
4. Great for cash flow
Very important for a small company, especially if you’re the boss. “If you can’t afford to give pay rises to staff,” says Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD), “they [stock options] are a good idea, though you will need to spend time on education, communicating their benefits to staff.”
5. They incentivise (you hope)
From boardroom right down to the lower corporate rungs, stock options are often designed as an extra carrot plus stick. If staff are incentivised, goes the theory, the more productive they’ll be.
(This, note, isn’t always true: recent research suggests that, like a failing diet, a performance change may only be temporary.)
6. Zero charges
Stock options generally don’t come with charges attached. While a few quid in fees doesn’t add up to much initially, monthly fees from conventional stock market savings vehicles sap the energy of savings long term, draining performance potential.