A Share Incentive Scheme (SIS) is a program designed to reward employees by giving them shares in the company. This is often contingent upon achieving personal or group performance targets. These schemes align employee interests with the long-term success of the company.
Historical Context
Share Incentive Schemes have their roots in the early 20th century when companies started recognizing the benefits of employee stock ownership. The first notable program in the United States was introduced by Sears, Roebuck & Co. in 1916. Over time, these schemes have evolved to include a variety of structures and are now widely used worldwide.
Types/Categories
There are several types of Share Incentive Schemes, each with its unique features:
- Employee Share Ownership Plan (ESOP): Provides employees with company shares, often at no upfront cost.
- Employee Share Ownership Trust (ESOT): A trust holds shares on behalf of employees.
- Enterprise Management Incentives (EMI): Tax-advantaged share options for qualifying companies.
- Restricted Stock Units (RSUs): Shares given to employees but subject to vesting criteria.
- Savings Related Share Option Scheme (SAYE): Employees save regularly and use the savings to purchase shares at a discounted price.
- Share Option Schemes: Employees are granted the option to buy shares at a future date for a predetermined price.
Key Events
- 1974: Introduction of the Employee Retirement Income Security Act (ERISA) in the US, which increased the popularity of ESOPs.
- 2000: UK government introduces the Enterprise Management Incentive (EMI) scheme to encourage share ownership in smaller companies.
- 2013: Enhanced legislation in many countries to promote wider use of Share Incentive Schemes.
Detailed Explanations
How Share Incentive Schemes Work
These schemes typically involve setting performance targets or criteria that employees must meet to qualify for shares. The shares may be given outright, offered at a discount, or subject to vesting periods.
Example: An employee may receive 100 RSUs, vesting over four years. If the company’s stock price increases, the value of these shares can significantly contribute to the employee’s wealth.
Mathematical Models/Formulae
graph TD;
A[Employee Achieves Performance Targets] --> B[Shares Allocated to Employee];
B --> C[Vesting Period Completed];
C --> D[Shares Transferred to Employee's Ownership];
D --> E[Employee Sells Shares] --> F[Employee Gains Financial Benefit];
Importance
Share Incentive Schemes are important for several reasons:
- Employee Motivation: They motivate employees by aligning their interests with the company’s performance.
- Retention: They help retain talent by creating long-term financial incentives.
- Ownership Culture: They foster a culture of ownership and responsibility among employees.
Applicability
These schemes are applicable in various industries, particularly where employee performance and retention are crucial. They are especially common in technology and start-ups.
Examples
- Google: Known for its generous stock option grants to employees.
- Apple: Offers RSUs to employees, which become valuable as the company grows.
Considerations
- Tax Implications: Employees must be aware of potential tax liabilities associated with receiving and selling shares.
- Dilution: Issuing new shares can dilute the value of existing shares.
- Market Fluctuations: The value of shares can be volatile.
Related Terms with Definitions
- Vesting: The process by which an employee earns the right to own shares over time.
- Grant Price: The fixed price at which an employee can purchase shares in the future.
- Exercise: The act of purchasing shares at the grant price under a share option scheme.
Comparisons
- Share Option vs. RSUs: Share options give the right to purchase shares at a future date and price, while RSUs are shares granted with certain restrictions.
- ESOP vs. SAYE: ESOPs often provide shares for free or at a nominal cost, while SAYE involves saving to purchase shares at a discount.
Interesting Facts
- Wealth Creation: Many employees have become millionaires through generous share incentive schemes in high-growth companies like Facebook and Google.
- Global Adoption: Countries worldwide have adopted various forms of Share Incentive Schemes to boost employee engagement and productivity.
Inspirational Stories
- Microsoft: Early employees who received stock options became wealthy as the company grew, inspiring a culture of innovation and commitment.
Famous Quotes
- “The best way to predict your future is to create it.” – Peter Drucker
Proverbs and Clichés
- “Having skin in the game.”
Expressions, Jargon, and Slang
- “Stocked up”: Refers to employees who hold significant shares in their company.
FAQs
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What is a Share Incentive Scheme? A program where employees receive shares of the company upon meeting certain performance criteria.
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How do Share Incentive Schemes benefit employees? They provide financial incentives and align employees’ interests with the company’s success.
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Are there tax implications for Share Incentive Schemes? Yes, there can be tax liabilities when receiving and selling shares.
References
- NCEO (National Center for Employee Ownership)
- IRS (Internal Revenue Service)
- HMRC (Her Majesty’s Revenue and Customs)
Summary
Share Incentive Schemes play a crucial role in modern businesses by aligning employees’ interests with the company’s success, motivating and retaining talent, and fostering a culture of ownership. With various types and structures, these schemes offer a versatile tool for enhancing employee engagement and driving company growth.
