FIT's Implementation Team
Summer 2023 Briefing

Welcome to our implementation team’s summer 2023 briefing, covering some of the latest technical and practical developments affecting executive and employee share-based incentives.

Our briefing includes updates on the following topics:

• UK Corporate Governance Code consultation
• CSOP limit increase
• Revised SAYE bonus rate mechanism and important changes to CGT
• EMI reforms
• HMRC call for evidence on all-employee share plans
• Policing of share ownership requirements
• Recent international developments in Australia and the USA

This briefing may be of particular interest to general counsel, company secretarial teams, reward specialists and those interested in the technical aspects of share-based incentives.

If you have any questions regarding any of the topics covered in this briefing, please reach out to one of our implementation team’s partners (Matthew Ward and Richard Sharman) or your usual FIT contact.

UK Corporate Governance Code consultation

In May, the Financial Reporting Council (FRC) launched a public consultation on the latest iteration of the UK Corporate Governance Code (Code).

Several significant changes to the Code are proposed, including a number of specific requirements which will impact executive remuneration at listed companies subject to the Code. In terms of implementation related aspects, there are a couple of proposed changes that are particularly noteworthy.

The first relates to strengthened requirements relating to malus and clawback provisions, including extended disclosure requirements and reference to incorporation of provisions into employment contracts of executive directors and/or other agreements or documents which cover directors’ remuneration. In our experience, this is already done by reference to the wider rules or polices of the company and better left out of employment contracts, save for passing reference although some companies are incorporating malus and clawback provisions in a standalone agreement rather than within the various plan rules.

The FRC has not (yet) stated which triggers might be expected for application of malus and clawback. The supporting guidance to the 2018 version of the Code included a set of recommended triggers and an updated version of that guidance is not expected until the final Code is published (probably in late 2023 or early 2024). It therefore remains to be seen if the FRC will provide guidance on what ‘minimum’ compliance looks like.

The second noteworthy aspect is the continuing emphasis on incorporation of ESG objectives into incentive arrangements.  The FRC proposes to re-word the revised Code to set an expectation that remuneration outcomes are aligned with corporate performance in the wider sense, including ESG objectives. This is a continuing theme from regulators and investors, and we are seeing more companies incorporate ESG measures and targets into their incentive arrangements.

The consultation will be open for comments until 13 September 2023 and the FRC has said that it intends that the revised Code will apply to accounting years commencing on or after 1 January 2025. FIT has submitted its comments to the FRC.

For a fuller review of the remuneration aspects of the Code consultation, please see our earlier briefing here.

CSOP limit increase

At the ‘mini-budget’ last year, the UK government announced that it would be increasing the limit on the value of shares over which tax-advantaged CSOP options may be granted from £30,000 to £60,000. The revised limit took effect from 6 April 2023 and will make CSOP options more appealing to senior management, especially for awards below board level.

In addition, the government announced that the rules regarding the type of shares that can be used with CSOP arrangements will be relaxed. Those rules have previously made it difficult for unlisted companies to offer CSOP options and, therefore, this is a welcome change.

We are also seeing increased interest from companies in exploring whether it may be appropriate to offer ‘combined model’ awards whereby the tax-advantages of CSOP options (favourable taxation for both participants and employers) are incorporated into the operation of an otherwise typical deferred bonus plan or long-term incentive plan. Please get in touch if you would like to understand how this might be implemented for your business.

Revised SAYE bonus rate mechanism and important changes to CGT

Following a review launched in June 2022, HMRC has announced that it has updated the mechanism used to calculate SAYE option scheme bonus rates.

The bonus is effectively interest on the savings made by participants in SAYE schemes. It can be delivered as a tax-free payment which is made by the savings carrier (e.g. bank or building society). Alternatively, the bonus can be used, along with normal SAYE contributions, to purchase shares at the discounted option exercise price. This means that SAYE participants could acquire an increased number of shares than otherwise would have been the case when bonus rates were nil.

The new mechanism will be set by reference to the Bank of England base rate and will apply to new invitations after 18 August 2023.

The other recent tax change that is likely to have an impact on SAYE schemes (as well as other share incentive arrangements) is the reduction in the CGT annual exempt amount. This has reduced from a relatively generous amount of £12,300 in the 2022/23 tax year, to £6,000 in 2023/24, and is due to reduce to £3,000 for 2024/25. Such reductions increase the likelihood that SAYE options will generate taxable capital gains (above the exempt amount) and potentially trigger SAYE participants having to submit a self-assessment return. There are ways that some of these consequences could be mitigated for participants, e.g. making use of transfer to spouses/ partners. Companies should update their SAYE communications to help their employees navigate these new challenges.

EMI reforms

HMRC recently announced the removal of two administrative burdens in respect of operating tax-advantaged Enterprise Management Incentive (EMI) schemes.

Effective in respect of options granted from 6 April 2023, there is no longer a requirement to set out details on any restrictions on the shares to be acquired under the option nor a requirement for the grantor to declare that the employee has signed a working time declaration.

At the same time, HMRC announced that, from 6 April 2024, the deadline for post grant notifications for notifying an EMI option will change from notification within 92 days of grant to notification by 6 July of the end of the tax year in which the option is granted.

These relaxations are designed to further simplify the implementation of EMI options for companies that qualify for EMI and result in fewer technical “trip hazards” as to EMI qualification.

HMRC call for evidence on all-employee share plans

In May, the government published a ‘call for evidence’ in relation to the two HMRC tax advantaged all-employee share plans: SAYE and SIP.  The document recognises that the number of companies and employees using these schemes has been in decline for a number of years and aims to gather views on what improvements could be made to simplify the schemes and encourage greater participation, especially amongst lower income earners.

In particular, the government is seeking views on:

• the effectiveness and suitability of the schemes and whether they are fulfilling their policy objectives;
• current usage and participation and whether there are barriers to participating in the schemes;
• whether the schemes’ rules are simple and clear as well as whether they offer enough flexibility to meet individual firms’ needs;
• whether the schemes suitably incentivise share ownership for lower income earners; and
• what other performance incentives businesses offer their employees and how these compare with SAYE and SIP.

In addition to the call for evidence, HMRC has also published an independent research report evaluating the impact of CSOPs, SAYE and SIPs. The report provides a useful summary of current attitudes towards tax-advantaged employee share schemes. One of the factors potentially leading to the relative decline of tax sponsored all-employee share plans is the increased prevalence of PE-backed companies as larger employers. While many such companies introduce all-employee plans on IPO, they are much more complex to introduce pre-IPO.

The consultation will remain open until 25 August and comments can be submitted via an online survey that can be found here. FIT will be collating comments from interested clients and submitting them; please get in contact if you would like to add your views into this.

Policing of share ownership requirements

In line with the requirement under the UK Corporate Governance Code, main market listed companies have introduced both “in service” and “post service” share ownership requirements for their Executive Directors, often expressed as a % of salary. Many companies first introduced post-cessation requirements on the introduction of their 2020 policies and, therefore, this year is leading to the first cycle of awards vesting under those policies.

In our experience, practice in relation to the policing of such share ownership requirements varies.

As a minimum, a written policy is recommended, which typically runs to a couple of pages (covering the requirements, timings, what is caught, the basis of calculation and a required acceptance of terms). It is important that any share ownership policy is carefully aligned with the directors’ remuneration policy, as well as any other related incentive scheme documentation.

For companies wishing to have certainty of enforcement, in particular in respect of “post service” requirements, we are seeing a number of clients making use of nominee arrangements, under which shares are funnelled into a designated nominee account (typically a modified version of a standard third party brokerage account) linked to the employer’s share ownership requirements.

Please get in touch if you would like to discuss the practicalities of documenting and enforcing your share ownership requirements.

International developments

(i) Australia – new regulatory rules

Effective 1 March 2023, there are new Australian laws regarding what is required in order to make employee share scheme ‘offers’ into Australia compliant under the “New ESS Rules”.

Whilst designed to ease the compliance burden, where the New ESS Rules apply, they introduce some awkward compliance burdens if participants have to provide ‘monetary consideration’ (payment) to acquire or receive shares under the employee share scheme (for example, such as would be the case if there was an option price attached to options, including if the option price was in practice funded by the participant selling some of their vested shares to cover the cost).

Such compliance burdens include that the offer materials must include a statement (arguably backed by a deed) that participants can recover damages from the grantor (i.e. the parent company) and/or its directors in the event of “loss or damage suffered as a result of” a breach of the misleading and deceptive statement/omission provisions of the New ESS Rules.

Furthermore, where the New ESS Rules apply and an employee benefit trust (EBT) is involved in respect of the operation of the scheme, the New ESS Rules require that the EBT’s trust deed contains certain protective terms not ordinarily found in EBT deeds.

Thankfully, there are some helpful exemptions from the New ESS Rules (as there were in respect of the Old ESS Rules) in respect of offers to ‘senior managers’ or those with income of more than A$250,000 per annum or assets greater than A$2.5m, but careful consideration of the New ESS Rules is now relevant for award policy outside of those groups and is leading to frustration in respect of all-employee schemes.

(ii) USA - new clawback rules for listed companies (potentially including overseas entities)

The US Securities Exchange Commission (SEC) recently adopted a new clawback rule that requires companies with securities that are listed on a US exchange to clawback incentive compensation from executive officers if the company’s financial statements are restated. The amount to be clawed back is determined by reference to the amount of incentive compensation that would have been received if the financial statements had been prepared correctly, i.e. considering the effect of the restatement.

It is worth noting that the new rule applies to securities listed on a US exchange and, therefore, potentially applies to UK companies that have listed shares or debt on a US exchange (despite not being a US corporate entity themselves) and/ or not having any US-based participants.

The new rules contain a number of interesting differences compared with UK clawback provisions, including mandatory application (UK clawback rules are typically discretionary) and strict liability (UK clawback rules will normally take into account the culpability of executives).

The SEC has subsequently approved rules proposed by the main US exchanges (NYSE and NASDAQ) which means that impacted companies will need to adopt compliant clawback policies by 1 December 2023.

FIT’s implementation team are lawyers who focus exclusively on the legal and technical aspects impacting incentive plan design and operation (including global plans).  The team helps our clients with documenting their incentive awards and to navigate the increasingly complex issues that can arise during all stages of an incentive award’s life cycle.

The team members are partners in both FIT Remuneration Consultants LLP and FIT Remuneration Implementation LLP (the latter is our specialist law firm authorised and regulated by the Solicitors Regulation Authority).

Triennial review by the Remuneration Consultants Group

For Remuneration Committee Chairs among our readers, we would be grateful if you could complete the Remuneration Consultants Group (the body which oversees our code of conduct) survey which can be found on-line via Survey Monkey at https://www.surveymonkey.co.uk/r/SVTPP27.    

Further details can be found there containing an introduction by the RCG’s Chair, Alan Giles, the survey questionnaire and a link to the current Code of Conduct. The RCG has sought to make the provision of feedback as straightforward as possible through a series of 15 set questions about the Code. We would be grateful if you could complete the survey by 31 July.