Discretion and employee share schemes

Discretionary share schemes

Enterprise Management Incentive (EMI) and Company Share Option Plan (CSOP) options are popular choices for companies who want to operate their share option arrangements flexibly. Both plans allow the directors an element of choice and discretion in key areas:

• Who gets to benefit
• The level of awards
• How to treat leavers

The limits of discretion

Directors exercising discretion doesn’t mean directors have a totally free hand – the board should exercise care when they’re making decisions. Deciding to exclude someone  from a share plan without a good reason may, in the worst case scenario, open the company up to potential actions from disgruntled employees, particularly if there’s a suggestion that someone’s been excluded for discriminatory reasons.

How to exercise discretion reasonably

The risk of a challenge can be reduced if directors act reasonably and rationally – and can demonstrate that they did so at the time. For example:

Use objective criteria to select participants and the value of awards to be made. For example, base awards on roles and positions in the company (it’s perfectly valid to differentiate between directors, senior managers and junior staff); or another clear measurement such as salary (unless, of course, you’ve based salaries on non-objective criteria to begin with!)

• If you pick out specific participants to get a higher (or lower) level of award, or decide not to include them at all, be very clear about why you’ve made that decision. That might be based on past performance, or length of service.
• If you’re running a small business, or a family owned business, take care to think about any conflicts of interest that might exist – creating “favourites” based on personal or family relationships should be avoided in a business context.
• Try and keep your approach consistent – this is particularly important when you’re considering whether or not to treat departing employees as “good” or “bad” leavers.

Record keeping

Whatever decision is made, this should be recorded at the time, whether it’s made by the board itself or (for larger companies) at remuneration committee level. At the time, the reasons for making a decision may appear quite self-evident – but you can be sure that, six months down the line, memories will be hazy and it may be really hard to prove why a certain decision was made. If the directors are in any doubt about whether they are exercising their discretion correctly, they should always take specialist employment law advice.

For more information about discretionary employee share schemes download our free fact sheets or contact us on 020 8949 5522 / enquiries@rm2.co.uk