Shared-based employee benefits have their origins in the US where this form of motivation and reward for employees, both senior executive and company-wide, has been commonplace for some time. There is little doubt that there is now an equal interest in these structures in the UK and also, slowly, in continental Europe.

The UK has legislated on a number of occasions to encourage the use of employee share option schemes (ESOPs) in the reward package of employees. There are, as a result of this legislation, a number of extremely tax-efficient structures for the employer and employee, that are much used by UK companies.

Three principle schemes exist. These are the approved profit sharing scheme; the approved Savings Related Share Option Scheme (or Save As You Earn – SAYE – Scheme as it is now more usually referred to); the statutory ESOP; and the Qualifying Employee Share Trust (Quest).

All three deliver shares to employees in a generally tax- free way and enable the employing company to obtain a statutory corporate tax deduction for all contributions made in relation to the scheme. In last year's Finance Bill, the Government, , introduced some revisions to the regulations covering SAYE plans enabling a lower level of monthly saving and a shorter minimum saving period, both of which have increased the popularity of these shares and have led to an increase in the level of take-up.

Unapproved plans have also developed considerably recently. The prime advantage of these unapproved plans is that they are generally more flexible than the approved plans, but the price of this flexibility is a reliance on case law to obtain the corporate tax deduction and the slightly less efficient tax treatment of the ultimate benefit. In order to ensure the best tax treatment for the trust, it is often the case that the trust is established in an offshore location.

The best unapproved schemes received substantial publicity and continue to do so, as a result of the media frenzy over executive pay and share option schemes. There followed the Greenbury Committee, whose report has led to a flurry of activity in the share schemes world.

A large number of companies have been persuaded to replace their executive share option plans with Long Term Incentive Plans (LTIPs), as recommended by the Greenbury Report. It is believed that 80 of the top FTSE 100 companies have now established LTIPs in one form or another.

Notwithstanding this, the use of option schemes continues to flourish. Following another government intervention, reacting to the same media frenzy, a limit was placed on the level to which tax relief would be given on approved share option plans.

This has led to the “splitting” of some of these schemes, which has led to approved and unapproved option schemes running alongside one another.

Another result of the Greenbury report has been an amendment to the Stock Exchange listing rules. It is now a requirement that shareholder approval is obtained for LTIPs, to include cash-based plans and all schemes which involve the issue of new shares. It is also the case that no discounted options can be granted without shareholder approval.

One of the many recommendations of the report was the inclusion of “challenging” performance criteria in such plans. There has been much debate about the extent of this challenge and a number of companies have encountered con- siderable resistance to their proposals from shareholders at the time of the AGM seeking such consent.

A very recent development has been the increasing requirement for the participant to “risk” some of his own funds. This is more the case for executive plans. Under these arrangements, the participant is required to purchase a minimum number of shares out of his own pocket and these are held by a third party, usually a trust, for a specified length of time. At the end of this period, sometimes depending also on the achievement of a performance requirement, the company will “match” the shareholding on a predefined formula.

Globally, companies are extending their domestic share schemes to cover their overseas staff, a trend which signifies the increasing popularity of these schemes.

It is a generally held view that as the workforce becomes ever more mobile, not solely within one country but from country to country, so the requirement for similar remuneration packages will increase.

Given this requirement, employee share schemes will definitely form part of this strategy. Given its leading position in this speciality, the UK and its companies and advisers are particularly well placed to play a leading role in this expanding sector.