For most companies, employees are the prime source of competitive advantage. Without the salary resources of larger organizations, however, smaller companies must take a creative approach to attract and retain high caliber staff. Employee incentive schemes have become an increasingly widespread and effective tool in the war for talent. Offering employees a future financial benefit, linked closely to the performance of the company, allows businesses to make the most of scarce cash resources and ensure that certain key employees are sufficiently rewarded (through share ownership) for longevity of service or performance.
However, the recent Age Discrimination Regulations (‘the Regulations’), which came into force in October 2006, means that companies using these tactics must review the structure and nature of these schemes or risk opening themselves up to action from disgruntled employees.
As an overview, employee share schemes can either be in the form of share options (which provide the employee with the right to acquire shares in the company at a pre-determined price at some time in the future), or can deliver shares to the employee directly.
Types of employee share schemes can broadly be categorised into:
(i) Her Majesty’s Revenue and Customs (“HMRC”) tax approved schemes which can be either share or share option based and which includes the Enterprise Management Incentive scheme;
(ii) tax unapproved share option schemes; and
(iii) tax unapproved discretionary share plans which are generally performance related and are also known as executive Long-Term Incentive Schemes.
It is common for these schemes to contain provisions or be operated with policies which incentivise one group of employees, to a greater degree, over others or which could lead to employees of different ages being treated differently. Whilst such provisions or policies might be a reflection of certain employees’ value to the company’s bottom line, the Regulations give individuals rights not to be treated differently or discriminated against because of their age in relation to recruitment, terms of service and termination of employment. Discrimination can be direct or indirect where, for example, a particular provision, criterion or practice puts a particular age or age group at a disadvantage.
To take two examples: Company A and company B have two separate schemes designed respectively, to increase staff retention and loyalty and to increase divisional performance. Company A’s scheme rules contain provisions prohibiting the grant of an award, to any employee within 1 year of their retirement for obvious reasons. Company B’s scheme makes discretionary share awards only to directors and senior managers as a direct reward for meeting targets.
Under the current Regulations, however, Company A’s blanket prohibition in the scheme rules directly discriminates against employees on grounds of age. This would also be the case were Company A’s rules not to contain such specific provisions, but instead Company A operated a ‘policy’, the effect of which was to prohibit the granting of awards to those employees nearing retirement. . Company B on the other hand could be held to account for indirect discrimination, as the majority of award holders would be older employees by the nature of their roles compared to the workforce generally.
Whatever your view on the Regulations and before accusations fly that ‘this is political correctness gone mad’, the Regulations have not categorically disallowed such potentially discriminatory provisions or policies. This would clearly be detrimental to the success of the schemes in allowing smaller companies to attract entrepreneurial talent. What the Regulations do say is that any such provisions or policies must fulfil a legitimate aim and is appropriate and necessary to achieve that aim.
The Regulations do not provide any specific examples as to what might constitute a legitimate aim, although encouraging and rewarding loyalty and economic factors such as business needs may suffice. Although ACAS and DTI guidance says that discrimination cannot be justified on the grounds that it is cheaper, employers will have to wait for decisions made in the tribunals on these matters to be heard by the higher courts in order for the judiciary to supply appropriate meaning in this area.
In the box, we have listed an outline of the most common provisions to share schemes which are open to dispute under new Regulations (Fig 1. See attached table).
Click to view the Table of Provisions.pdf
Companies with employee share incentive plans in place containing these provisos should consider the following action points:
- Companies must review the policy for all existing employee share incentive schemes and properly minute and record all justifications that such potentially discriminatory provisions or policies fulfil legitimate aims and are appropriate and necessary to achieving those aims. For example, where the legitimate aim of the reward policy is to retain and incentivise key employees and as such participation in the scheme is only extended to certain senior management on a discretionary basis.
- Amend the scheme rules to remove any such prohibitions that are contrary to the Regulations, if such prohibitions cannot be properly justified. For example, to remove any blanket prohibition on participation in a company’s share scheme for those employee nearing retirement.
- Review and amend the specified retirement ages to ensure that they are set at the minimum statutory level; For example, where the rules of a company’s existing HMRC approved Company Share Option Plan provides for a specified retirement age of 65, amend the rules to reduce the specified age to 55 in line with the statutory specified retirement age for such plans.
- Review the rights of exercise / vesting for retirees and other leavers to identify any discrimination issues. Amend any pro rating provisions to disapply any distinction between good leavers and retirees.
Please contact Chris Page, Head of Employee Incentives, if you have any questions.