EIM40014 | The year that earnings are “for” - Long Term Incentive Plans and Deferred Remuneration

Various schemes exist to reward and provide incentives to employees. Not all intended outcomes will be the same. The intention of the employer and the intended behavioural effect will influence the design of the scheme. For example, plans may be intended to:

• Tie-in valued employees and create a disincentive for leaving and moving to a competitor, or,

• Motivate and reward outstanding performance by aligning the interests of employees with those of the shareholders

Schemes intended to aid retention may include the following features:

• Bonuses are paid after 3 – 5 years of satisfactory employment

• The employer has discretion to award or deny bonuses for good or bad leavers

• Part bonuses are paid year on year with other entitlement remaining in the Plan

• Part entitlement to bonuses “vests” each year, but is not paid until a later year

Schemes intended to motivate and reward outstanding performance may include:

• Employment targets linked to growth in the company’s:

• share price

• turnover

• net profits

• expansion of certain markets

• market share

• Granting employees real stocks and shares or “phantom” shares in the company. (In the phantom schemes, no stocks or shares are assigned to the employees. Bonus entitlement is calculated by reference to a notional share portfolio.)

Payments may be made up of amounts arising from different bonus periods and different deferred remuneration plans. If component amounts are “for” different tax years, different rules within Part 2 Chapters 4 and 5 may apply, to produce different liabilities to income tax.

Awards from both types of schemes are likely to be “for” the whole performance or reference period. If this is greater than one tax year then the final award should be apportioned over the tax years falling into the performance period on a reasonable basis.