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Our experience

We have a long history of advising both FTSE listed companies as well as AIM listed clients in implementing employee and executive share schemes. We have years of experience designing and implementing approved schemes such as SIPs and CSOPs as well as unapproved schemes such as JSOPs or Unapproved Options. And we work extensively with a variety trustees and administrators to ensure the smooth implementation and operation of such schemes.

Tax Considerations

Generally speaking the approved schemes such as SIPs and CSOPs create a environment where gains made by the employee are taxed as capital instead of income. However we would advise clients to look at our literature on these schemes for more detail.

However for executive compensation arrangements the approved schemes are typically unable create an appropriate incentive and many companies use LTIP cash bonuses or Unapproved Options instead. These schemes have the merit that they are flexible however the reward is generally taxed as income which at the typical marginal rates of the participant can be significant and creates a national insurance cost for the company.


JSOPs were invented by David Pett and William Franklin at Pinsents and have been widely adopted by other firms and have been widely used to incentivise senior management in listed companies. They can be an excellent solution for listed companies whose shares are too valuable to make SIPs and CSOPs a viable solution to incentivise senior management.

Compliance Advice

Listed companies as compared to private companies are subject to a variety of rules and regulation which can impact on employee share schemes. At Pett Franklin we are experienced in advising on  regulatory matters such as dilution limits, anti-money laundering, RNS announcements as well as other regulatory and compliance activity.

Managing Dilution Costs

One of the recurring concerns of shareholders when establishing employee share schemes is the risk of their interests being diluted over time to a greater extent than is commercially appropriate, particularly as the impact of dilution can be hidden for years and only become evident when share awards vest and shares are acquired, by which time it is too late to mitigate the impact on shareholder value.

It is in order to counteract this that shareholder bodies, and in particular the Investment Association, recommend dilution limits when establishing a scheme.   There are various limits which can be applied, with the most common preventing the granting of awards which might result in shareholder dilution of more than 10% in any ten-year period.

Despite the use of dilution limits having been present in well designed employee share schemes for decades, managing them effectively proves challenging for many companies, with frequent examples of awards being granted in breach of the limits (and therefore the scheme rules) or the level of awards in the early years of a scheme using too high a proportion of the capacity and limiting the scope for awards at a later date.

To avoid this, the management of dilution should be addressed when a scheme is established, both in terms of the plan design and related documentation and in the operational management of the scheme and the company’s share capital.

Some key aspects of this include:

  • Before the scheme is established, consider whether the normal 10% in ten years limit is likely to be sufficient. If there are good, commercially justified, reasons to support a higher limit, shareholders may be sympathetic if this is included within the original plan design. There is less likely to be the same degree of understanding and flexibility if a higher limit is sought several years after the scheme is established as a result of the management of the plan in the meantime.
  • Limit the time period over which dilution is measured. For instance, a company listing for the first time through an IPO would normally exclude shares acquired pursuant to awards made prior to the flotation.
  • Ensure that the scheme documentation only applies by reference to newly issued shares. Shares bought in the market or off market from other shareholders should not impact on dilution limits.
  • Exercise caution, however, with buying shares into Treasury. This will have the effect of reducing the total share capital for dilution limit purposes and thereby restricting future awards. This is not the case with shares which are purchased by an Employee Share Ownership Trust (ESOT). 
  • Subject to the impact on the tax treatment of awards, allow for awards to be satisfied through equity settlement (or Stock Appreciation Rights (SARs)). For options granted with a market value exercise price, this can occur through satisfying awards by cancelling the exercise price payable and instead of issuing new shares, provide for the participant to acquire a number of shares equal to the gain inherent in their options. As that will result in fewer shares being issued, the impact on dilution is reduced without any reduction in the value delivered to the participant.
  • Similarly, with a Joint Share Ownership Plan (JSOP), the conversion of awards into a number of whole shares rather than selling the shares subject to the awards will reduce the number of shares required to satisfy the value inherent in the award releasing further shares for new awards.
  • If the Company is prepared to pay money to cancel awards, the dilution cost will be removed entirely. This will not be compatible, however, with an agreement to transfer the costs of employer national insurance contributions to participants.
  • Establish a dilution management tool on inception of the plan to track awards, their impact on dilution limits and the interaction with other events affecting the share capital which indirectly affect dilution restrictions (such as corporate transactions resulting in further share issues) and ensure that dilution is kept under close review by the Board and in particular the Remuneration Committee.

If you have any questions on dilution or concerns about the operation of limits in your company, please call 0121 281 5798 or email

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