Share options. Why bother?

With a pick up in the economy and a renewed appetite for IPOs share options are once again a topic of discussion. Ian Wallis looks at whether you should be bothering

Hailed as a win-win solution to boosting productivity and employee retention, share options died something of a death in a struggling economy.

Fuelled by dot com promises of wealth to come, the paper-rich workers ultimately had little or no prospect of realising any value. As a result many firms dropped plans along with intentions of going public. “When the economy suffered staff became more interested in staying in progressive, well-paid jobs with quantifiable packages, so there was less reason to implement schemes,” says Peter Goodman, head of tax at accountants Wilkins Kennedy, which principally deals with small and medium sized businesses.

Then last year, Microsoft ditched its own option scheme bringing the issue to the fore once again. It decided to grant shares instead, explaining that this practice is recorded on balance sheets, giving analysts a better view of the company’s financial state and workers a tangible incentive. To compound matters, the International Accounting Standards Board is now proposing firms should be forced to put the cost of the share-based awards through the profit and loss account, significantly adding to the expense for smaller businesses.

And finally, the Quoted Companies Alliance, the body representing the interests of smaller quoted companies claims tax legislation introduced by Chancellor Gordon Brown in the past few years has discouraged companies from operating schemes, fearing an unforeseen tax liability.

But, the flak has not been enough to deter a new wave of businesses from setting up schemes in an improved economy. With more flotations on the cards this year than for some time, share options are rising back up the agenda. “From our own clients’ perspective,” says Wilkins Kennedy’s Goodman, “there’s certainly more confidence about. Better profits are on the way and companies are prepared to invest in good strategic plans to secure their key people.”

One entrepreneur eager to take the plunge was Adrian Moss of Deal Group Media. The AIM-listed company introduced its options scheme in December 2003, and says the market responded positively. He went for an ‘approved’ scheme, which all 62 staff are entitled to be a part of after six months. Awards within Deal Group are made commensurate with input, so staff in administrative roles receive fewer options.

“From my perspective the benefits are extremely beneficial and real,” says Moss. “The material benefit of real cash for staff who have generated it is fundamental to their package and these options should potentially be worth in excess of a year’s salary, even for junior staff. I don’t know why people would see it any other way.”
Moss is keen to emphasise that unlike some companies who have offered attractive options against lower than market salaries, his company views the scheme as additional benefits and chose a scheme with strong tax breaks “so as not to leave a bitter taste. It would otherwise be demotivating if the share price dropped and would have a negative impact on productivity and growth.”

Another company to have set up a scheme recently is city centre apartment developers City Lofts, which floated on AIM in December 2003. It opted for both an Inland Revenue ‘approved’ and an ‘unapproved’ scheme, due to the £30,000 limit per employee under its approved scheme. Chairman Nigel Denby says the company’s benefits package is fairly limited, but options were viewed as crucial.

It chose an ‘off-the-shelf’ set of rules, which didn’t require too much fiddling around. “It’s important to make sure they’re not too complicated. We’re not a big company in terms of numbers so we weren’t after anything revolutionary. But we do believe these schemes will incentivise our staff to deliver growth,” he