What type of LTIP is typically offered?

What type of LTIP is typically offered to senior executives in the UK?

Senior executives are usually these days offered incentives in the form of Performance Share Plans rather than options. Under an LTIP/Performance Share Plan an executive is awarded free shares which vest after, say, a three year period, subject to performance conditions and service conditions having been met. Since participants do not have to pay for the shares, they benefit from the "whole value" of the shares.

In contrast, if an employee is granted a "market value" share option then, in order to exercise that option, the executive normally has to pay an amount equal to the market value of the shares when they were granted.

One of the advantages of free shares provided under a Performance Share Plan is that they are likely to retain some value whereas options can be out of the money if the market value of the shares falls after the grant of the option.

In both cases the executive will be subject to income tax when the shares vest, either on the total value of the shares at that point in relation to free shares or on the difference between the exercise price that the executive has to pay (where the grant was of a market value option) and the value at that time.

EMI options are subject to a much more favourable tax treatment but they are specifically targeted at higher risk trading companies. The gross assets of the relevant company must not exceed £30 million and the company must have fewer than the equivalent of 250 full time employees at the time of grant. Where these and other strict conditions can be satisfied, so that EMI options can be granted, there is no income tax liability on exercise of the option if the exercise price is at least equal to the market value of the shares at grant. On the sale of the shares acquired, following exercise of the option, capital gains tax (rather than income tax where the rates are currently higher) would be payable on any gain over the market value at grant.

In deciding the type of share incentives that can be provided to the executive, the employer company will need to take into account regulatory requirements which will apply if, for example, the company's shares are traded on AIM or are listed on The London Stock Exchange.

For more information or advice, please contact Elizabeth Small, Partner, or Heather Corben, Partner, both in our Tax team.


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