Company Share Option Plan (CSOP)
The Company Share Option Plan (CSOP) is a tax-advantaged discretionary share option plan that can help a business reward all or selected participants for their long-term contribution to its ongoing success.
What is a CSOP?
The CSOP (Company Share Option Plan) is a tax-advantaged discretionary share option plan that provides a tax efficient and highly flexible way to reward all or selected employees and full-time directors.
Options can be granted to individual employees and directors, with options typically becoming exercisable 3 years after the date of grant. On exercise, participants pay the exercise price set at the beginning and become shareholders.
Individual performance and retention conditions can be built in, helping to ensure rewards are only distributed when key corporate objectives have been met.
The exercise price must be set at the time the options are granted, and must be equal to the full market value of the shares at that time – CSOP options cannot be granted at a discount.
Because of recent changes in the law, CSOP options can be granted over any share class. Private companies in particular may find this flexibility beneficial.
How we can help with Company Share Option Plans
RM2 are leading employee share scheme advisers specialising in all types of employee share schemes (including CSOP) and employee ownership plans. We are market leaders in offering our bespoke Employee Share Scheme services.
We take a unique consultative approach to building share plans by finding out what our clients are specifically looking to achieve. This allows us to deliver a professional and effective service tailored to the needs of your business and its employees.
The CSOP has fewer qualifying requirements than the popular Enterprise Management Incentive scheme (EMI). For example, there are no requirements for the company to be carrying out certain trades, or fall within certain limits relating to the number of employees or gross assets. The CSOP is, therefore, the next best tax efficient discretionary option plan for companies that may have outgrown EMI or don’t otherwise qualify.
For your business to benefit from implementing and managing a CSOP, several conditions must be met, including:
- Only UK employees and directors can be included.
- Directors must work for a minimum of 25 hours per week to be included.
- Participants must not already own more than 30% of the company’s share capital.
- Individuals may be granted CSOP options over shares with a maximum value of £60,000. There is no limit to the value of options that can be granted by the company.
- The company over whose shares the options are granted must be independent, i.e. not under the control of another company.
If you are not sure if your business satisfies the conditions for a company share option scheme, please get in touch with one of our experienced team, who can suggest an alternative share plan arrangement, explain the difference between plans and help you identify the one best suited to your needs.
The team at RM2 is entirely focused on designing, implementing and maintaining employee ownership plans in all their guises; it’s all we do, and we believe we do it better than anyone else, particularly those who don’t specialise like RM2.
Traditionally, the Company Share Option Plan has been used for senior executives and directors. However, there is no reason why the CSOP cannot be extended to all employees in the company or a group, provided they meet the legislative requirements.
Because the CSOP is a discretionary plan, this means that employees can be granted options on a differential basis. For example, senior staff may receive grants up to the maximum £60,000 value, but junior or lower paid staff can be rewarded at a level considered appropriate by the board or remuneration committee.
In addition, companies may choose to set different performance targets or vesting conditions for teams or individuals.
There are numerous benefits of implementing a Company Share Option Plan, but one important reason for considering one is to align employees’ interests with those of other shareholders but with significantly reduced financial risk. The CSOP allows your employees to benefit from future growth in the share value but there is no need to pay for the shares until the options are exercised and the shares are bought. If the share price has fallen over time, there is no obligation to exercise the option. This can help ensure lower paid employees can share in the benefits of a CSOP.
A Company Share Option Plan can introduce a host of benefits, including:
- Promoting long-term retention of key employees.
- Rewarding participants on a tax-advantaged basis.
- Encouraging growth by linking awards to performance targets.
- Minimising risks for the plan participants.
- Attract talented individual to the business.
There is no income tax or NICs charge when a CSOP is granted.
In addition, CSOP options can be exercised free of income tax and NICs provided the exercise occurs 3 years or more after the options are originally granted. Any increase in value is subject to the more beneficial capital gains tax (CGT) regime.
CSOP options can sometimes also be exercised tax efficiently within 3 years – for example, if the participant’s is a ‘good leaver’ (see below), or if the company is bought or taken over (usually for cash).
When an employee leaves the business, how their share options are treated will vary depending on the reason for them leaving, along with how the specific terms and conditions of the plan were drafted. The rules of a CSOP plan will often make a distinction between ‘good leavers’ and ‘bad leavers’.
Employees leaving due to redundancy or retirement, amongst other “no-fault” reasons, are typically considered good leavers and may sometimes benefit from accelerated or partial vesting of any unvested options. There will usually be a period after the end of employment when good leavers can exercise their options.
However, employees who choose to leave or are dismissed for gross misconduct often lose all their options, including any that may have already vested.
There are specific rules relating to leavers under the CSOP plan which may be unfamiliar to companies that have previously used Enterprise Management Incentive options, which give more flexibility for the treatment of good and bad leavers. How leavers are handled is one of the more important considerations for any share plan and a reason to talk to experienced specialists, such as those found here at RM2, who can advise on what to include in the terms and conditions and how they link in to your Company’s Articles of Association.
Client Testimonial
“Thanks for your friendly and professional support in setting up and running our SIP and CSOP. The plans are a great benefit for our staff, and RM2’s online portal makes everything easily accessible for them. We’d happily recommend your team to any company looking to set up and run an employee share plan!”
David Aldrich
Chief Human Resources Officer
dotdigital
Here at RM2, our experienced employee ownership specialists take a consultative approach to building share plans for companies of all sizes and complexity.
We work closely with every client to understand the reasons they want to share ownership of their business with all or a select few of their employees and identify the best plan to help them achieve their stated commercial objectives.
This approach helps us deliver the professional and effective service that has helped a growing list of clients meet their goals, grow their business and plan for future success.
And remember, our highly experienced team has a single focus; advising, designing, creating, developing and maintaining employee ownership plans in all their guises, with no distractions or other services demanding attention.
No team is better positioned to guide you through these eight stages needed to deliver the perfect Company Share Option Plan for your business. They are:
The design of your Company Share Option Plan will flow from your objectives. The more precise these are the better. What is your business plan, and what do you need from your employees to execute this plan successfully? Do you want to focus people on an exit from the business? Do you want to reward all employees as a team? Do you have just one key recruit in mind? We will ask you lots of questions to tease out your objectives.
This is the stage when you will need to decide on any rights and conditions to attach to shares, such as performance conditions and what happens when employees leave the business. Don’t worry though, our team has done this hundreds of times and will recommend features for you. One key decision is the amount of equity you want to set aside for share schemes. Again, our experienced team will help you with an indicative valuation and some equity modelling.
Another key decision you will have to make during this stage is the amount of equity you want to set aside for your share scheme. Our team will be able to help you with this by making an indicative valuation of your company and running some equity modelling.
Once the design and modelling stages are complete, we will work carefully through your company structure and identify what changes need to be approved by your existing shareholders. The team will then prepare resolutions to be passed and work closely with you to obtain the necessary approval from shareholders.
At the heart of any share plan is the set of rights and restrictions attached to the shares, and these are set out in the articles of association. We will prepare amendments so that these rights and restrictions strike the right balance between delivering value to employees and protecting the interests of other shareholders.
Our team will help prepare amendments to your Articles so that these rights and restrictions strike the balance between delivering value to employees whilst protecting the interests of other shareholders.
The share valuation can have a significant impact on how employees are motivated and on the tax treatment of the shares. Our team will prepare a share valuation and agree this with HMRC, which can take up to six weeks. Once agreed, you must grant the options within 90 days.
Just as importantly, we can help you understand the meaning of the valuation and its implications, then help you adapt your strategy according to the result.
Communicating relevant information about your share scheme and the reasons for implementing one, to all the participants, is vital to its long-term success. As part of our service, we provide every client with an easy-to-follow guide that explains the plan, in easy-to-understand language that will engage your employees.
We can provide further help and guidance to help you effectively promote the plan to your people, to further increase its chances of success.
Once your plan is implemented, it is critical that it continues to be administered effectively to ensure it remains compliant. We have the most experienced Compliance team for share schemes in the UK, so you can be confident that your scheme is in the most capable hands.
Our team tries to be as proactive as possible when it comes to monitoring your scheme’s performance. We can help improve any equity-based arrangements. Tax advantaged share plans and the concept of wider employee ownership is a constantly evolving regulatory environment. Whilst we believe no one knows this sector like RM2, we are always learning and will keep you apprised of the implications of any changes from government or HMRC.
Why choose RM2 as your Share Incentive Plan advisers?
Members of our team have been involved in the design of Share Incentive Plans (‘SIP’) and Enterprise Management Incentives (‘EMI’) legislation. They have commented on guidance, policy and market practice relating to employee share ownership to help the shape employee ownership sector. |
Understanding that a ‘one-size-fits-all’ approach to share plans will rarely if ever, meet a client’s objectives, we work in partnership with you to develop the personal relationship that guarantees any plan will meet your commercial objectives. |
Members of our team have been involved in the design of Share Incentive Plans (‘SIP’) and Enterprise Management Incentives (‘EMI’) legislation. They have commented on guidance, policy and market practice relating to employee share ownership to help the shape employee ownership sector. |
At RM2, we believe in taking a consultative approach to building share plans by finding out precisely what our clients are looking to achieve. This helps us to deliver a professional and effective service that helps clients meet their specific goals and plan for the future. |
As well as providing a complete design and implementation share plans service – including plan design, drafting, employee communications and valuations for tax advantaged share plans - , we also offer trusteeoffer trustee and administration services. |
Meet the team
If you are interested in creating a Company Share Option Plan for your company or would like to discuss the other employee share schemes that may be available to you, please get in touch today and we’ll explain about our free, no-obligation CSOP consultation.
The consultation, which can take place over the phone or via video call, allows you to ask questions of an experienced team member about the suitability of a CSOP for your business, about our services and the likely costs – our charges will vary depending on factors like the size and complexity of your business and likely plan features.
To arrange your free, no-obligation consultation, please contact us at enquiries@rm2.co.uk or fill out the form below and one of our team will contact you to arrange a call.
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