Coronavirus and operating Sharesave option schemes

While much of our recent briefings has focused on executive remuneration, the coronavirus pandemic has also thrown up a number of significant remuneration-related challenges for remuneration committees. One of those is the impact the pandemic potentially has upon a company’s all-employee share schemes, especially Sharesave option schemes (also known as ‘save as you earn’ or ‘SAYE’ schemes).

Sharesave option schemes are a form of tax-advantaged arrangement widely used by UK listed companies. Many companies will make annual grants of Sharesave options to their employees. It is, therefore, fairly common for a listed company to have two or perhaps three tranches of ‘in-flight’ Sharesave options, with one approaching maturity in the near future and another scheduled grant coming up. However, due to the scale of the fall in many companies’ share prices over the last few months, some (if not all) in-flight options will currently be underwater. We consider below some of the key implications for those companies with outstanding awards and for those considering future grants.

Should we proceed with our scheduled Sharesave grant this year?

Each case will be different, but in most cases a suppressed share price means that some employees will be keen to participate in a new grant in order to lock-in a substantial discount to the ‘normal’ share price (depending upon your view of when ‘normal’ may return). However, there are a number of other factors to keep in mind when deciding whether to proceed with a Sharesave grant:

• Company context: Have senior executives received long-term incentive awards as normal? If they have, there is an argument that the wider employee population should be treated in the same way, on the basis that it is “business as usual”, as far as remuneration is considered.  
• Existing participants: Employees with existing options may be tempted to cancel their options (especially if those options have a significantly higher exercise price). A new invitation must be made to all qualifying employees, so companies should anticipate this question and prepare carefully (see further below).  
• Dilution: Granting at a lower share price means that relatively more shares will be under option, therefore creating an increased impact on dilution (assuming similar levels of participation). If there is limited headroom, this can be managed by scaling back the award (subject to HMRC rules).
• Furlough: Furloughed employees will still be eligible to participate in a new grant, but will they have sufficient funds or confidence to commit to a 3 (or 5) year savings contract? Also, is it appropriate for the company to be seen to offer a new equity grant (with associated tax advantages) if a significant number of employees are furloughed (and possibly being paid via the Job Retention Scheme) and/ or under threat of redundancy.
• Further volatility: Some companies may be confident that the worst impacts of the pandemic are already behind them, but others may need to consider whether their share price may fall further. If that is the case, there is a risk that newly granted options would immediately be underwater; it may therefore be worth considering delaying the Sharesave launch until the share price has stabilised.
• Timing of launch: Consider whether it is appropriate to grant outside the normal 42-day window. If the launch is delayed, even by a few months, this could create administrative challenges when the options mature in 3 or 5 years. Consider the company’s normal reporting periods and any related closed periods that would make it difficult for options to be exercised, especially for directors and PDMRs.
• Communication: How will the new invitation be framed for employees? Will participants with existing options be encouraged to cancel and join the new invitation – this needs to be handled carefully. Bear in mind that communication may be read outside the organisation (and read in the context of the tragic circumstances of the pandemic).
• Promotion: It is common for companies to encourage participation in a Sharesave by promoting the launch with employee ‘roadshows’, including presentations from senior management and local employee champions. This may not be feasible in the current environment so alternative promotional strategies may be required.
• International sub-plans: Some companies also operate international variants of Sharesave that mimic the UK plan. These will also need to be considered in the context of what may be achievable due to local regulatory or tax requirements.

What should we do in relation to in-flight Sharesave awards?

If a company is considering whether to go ahead with a grant this year, it will often be worth looking at the outstanding awards under previous grants. In particular, whether participants might be tempted to cancel their existing option, receive their savings back, and join the new grant. This will mean the participant potentially gets a new option with a lower exercise price, but the consequence would be that the option maturity date would be later than under the existing option.  

A key consideration for many companies will be the accounting impact of cancelled options. If participants cancel their outstanding options this will normally accelerate the accounting charge for the original option under IFRS 2. In addition, there will be a new charge for any new options granted (although the potential ‘double charge’ can be mitigated in certain circumstances). Given the current economic backdrop some companies may prefer to ‘take the hit’ now, especially if employees are going to get limited economic benefit from an underwater option with limited prospect of getting back into the money.

The devil will be in the detail and different circumstances will produce different results. Companies should carefully consider what they can do, what they think is best for their employees in the wider context of the current situation of employees.

If you have any questions regarding what may be possible, please get in touch with your usual FIT contact (details at the end of this briefing).

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com.

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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