Individuals leaving the organization for redundancy, disability, injury, death or statutory
retirement-related reasons before having completed the repayment as initially planned,
can exercise their options according to the sum of money they have saved. By contrast,
participants to the scheme who have left the business during the initial three-year period
of the granting of the option cannot exercise any option.
Employees who leave the organization after three years that the option has been
granted are allowed to exercise the agreed option only whether this circumstance is
provided for by the scheme rules and, in any case, according to the sum of money they
have saved in the special account (Postlethwaite, 2009).
Also in this case, employers should decide at the outset whether the participants to the
scheme who have decided to leave the concern can hold the business shares or
otherwise. The plans regulations should therefore include clear indications about how to
manage this type of situations and eventually include a provision requiring employees to
sell their shares within the business before leaving.
Advantages of save-as-you-earn plans for organizations
Save-as-you-earn plans offer employers the same benefits offered by share incentive
schemes in terms of employee identification, involvement and commitment. However,
these schemes are easier to implement and administer in comparison with share
incentive plans.
The employer’s tax benefits produced by these programmes relate to the circumstance
that the gains made by employees can be considered, to the extent of the corporate tax
calculation, as employer’s expenses (Postlethwaite, 2009).
Capital gains tax avoidance
Individual Savings Accounts - ISAs
Employees can avoid the payment of the capital gains tax by directly transferring the
shares hold on a share incentive scheme or a save-as-you-earn plan to an Individual
Savings Account (ISA). This capital gain taxes relief is actually subject to a financial limit;
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within the shares value limit, this will not be due on the transfer of the shares or on their
disposal in the individual savings account at a later time.
Personal and stakeholder pension schemes
In some circumstances, the shares owned by an employee can be directly transferred
from a share incentive plan or save-as-you-earn plan to a personal or stakeholder
pension scheme. However, whether employees should dispose of their shares and make
a gain, this could be subject to the capital gain tax. Only whether shares are directly
transferred from a share incentive scheme to a pension scheme capital gain taxes do not
need to be paid.
Designing and developing employee ownership plans
After an employer has made the decision to introduce an employee ownership plan,
careful consideration needs to be given to the choice of the type of scheme. In order the
scheme to be welcomed and appreciated by employees, and hence successful, it needs
to attract as many employees as possible.
Employees at large may be glad to become shareholders of the business they work for,
but they clearly need to have the necessary funds to accomplish their desire. A share
incentive plan enabling employees to buy the company shares and benefit of tax reliefs
can represent the right option as far as employees possess the required amount of
money; differently giving employees free shares may reveal to be the most suitable
option to investigate and execute.
Especially whether employers should believe that it is unlikely that the company shares
could be bought internally, these should seriously consider the option of establishing a
trust and leaving there a quota of the shares. These measures would enable them to
control the number of shares object of exchange and to avert having to deal with the
unpleasant circumstance that part of the shares may remain unsold (Postlethwaite,
2009).
As for all of the other reward-related initiatives, also in this case communication is of
paramount importance. Employers and reward managers need hence to ensure that
accurate and frequent communication is established between the company and staff. The
main aim is obviously that to inform employees about the business performance,
irrespective of its real level, so that this needs to be regular and reliable. In the event
the company should be experiencing hardships negatively impacting its results, these
should be clearly and transparently outlined in the communications addressed to the
employees. The description of the reasons accounting for the eventually disappointing
performance and an outline of the plan of actions identified to overcome difficulties
should also constitute integral part of the communication established with staff.
The simpler, the better. As for every reward scheme and plan, keeping the mechanism
of the scheme simple and easy to explain and understand will help the effective and
successful introduction of the scheme, never mind its implementation. The use of the
corporate intranet, where a specific section including information about the business and
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its shares performance could be introduced, micro websites, flyers, guides and posters
could all represent suitable and effective means to support the communication process.
Unapproved employee share ownership plans
Company share option plans - CSOPs
Unapproved company share option plans can be considered as an extension of the
approved company share option plans. Since the approved plans are operated within the
shares value limit provided for by the law, the unapproved schemes can be used by
employers to exceed that limit. In order not to miss the benefits provided by the
approved company share option plans, the unapproved plans are essentially habitually
operated in addition to the approved schemes. By means of unapproved share option
plans employers are able to offer company shares to employees up to the limit of four
times their earnings.
Long-term incentives plans – LTIPs
These plans are introduced by employers in order to encourage employees to hold the
free shares received from the business under this scheme as longer as they can, rather
than selling them at the first occasion. Free shares can be offered to all of the employees
with the only prerequisite of a minimum length of service. Consistently with the scope of
this type of schemes, with the exception of illness, statutory retirement and redundancy,
these plans typically provide for individuals voluntarily leaving the organization to lose
their entitlement to free shares.
Restricted shares schemes – RSSs
Under these schemes employers essentially give employees a number of shares for free
with the main intent of retain their beneficiaries.
The shares given by employers to individuals are indeed characterized by a number of
restrictions in terms of: possibility to be sold, right to vote, transferability, participation
to dividends, etc., practically limiting their financial value. These restrictions are however
gradually removed, over a predetermined period of time, making these shares more
appetizing with the passing of time. These plans could be either extended to all of the
employees within a business or limited to some of the employees or groups of individuals.
The offer of these shares usually depends on the attainment of a pre-identified level of
organizational performance.
NIC, income tax and CGT
The unapproved employee ownership plans do not clearly benefit of the tax reliefs
provided for by the law in favour of the approved schemes.
Employers should however identify and made decisions about the most suitable scheme
to introduce and administer within their organization on the basis of the scope these
want to pursue and not exclusively considering, albeit undeniably non negligible, the tax
advantages which a plan could enable employees and employers to receive vis-à-vis the
others.
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Competency-related pay
According to the mechanism of this approach managers should make pay decisions
about their direct reports on the basis of the level of competency these gain with
reference to the role they fill.
Consolidated pay increases are hence conferred to individuals showing to have the
capabilities to perform at a higher-than-average standard not only presently, but in the
future as well. This scheme is potentially particularly effective in that enable managers
to award and recognize employees by means of pay increases within any given grade
pay brackets, without any need to necessarily offer them a career progression to the
higher grade or level of the organizational pay structure.
The first dilemma managers have to face when having recourse to competency-related
pay, however, concerns the identification of what it is meant by the use of the term
competency. Some substantial differences have in fact been identified by some Authors
and practitioners between the meaning of the terms “competence-competences” and
“competency/competencies.” The problem may apparently seem as overly rhetoric or
exceedingly terminological; indeed, making a clear distinction between the two terms
may effectively and very practically help managers to identify what they have to observe
and on what aspects they have to focus their attention in order to make sound and
sustainable pay decisions. This would in turn enable managers to more appropriately
define and recognize the most effective and suitable ways to assess these features and
characteristics.
As stressed by Neathey and Reilly (2003), for instance, a different meaning can be
associated with the two definitions provided in the late 1980s by the UK Government
when introducing the National Vocational Qualifications (NVQs) and Boyatzis (1982) just
a few years earlier. The UK Government essentially defined competence, for the NVQs
purpose, as a set of qualities enabling an individual to perform well. Competence is thus
considered as an occupational standard reflecting what level of performance and results
competent individuals need to be capable of yielding in their area of expertise.
Differently, Boyatzis (1982) defined competency as an “underlying” feature of an
individual leading or causing this to deliver effective or superior performance. The Author
also pointed out that competency has not to be confused with behaviour and that it is
not correct, as many people do, consider particular types of behaviour as skills. He also
added that whereas it is debatable considering behaviour as a skill, it certainly cannot be
considered as a competency.
All in all, it can be concluded that the main connotation associated by the UK
Government with the term competence refers to the final result or output to which the
superior performance eventually leads, output which also have to be identifiable and
assessable; whilst the Boyatzis’ definition seems to mostly focus on the way the
outcomes are produced and not simply on the final output. In this sense, individuals
should be rewarded for the way they work and not, or rather, not exclusively for the final
results these produce.
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In order to define the terms competency and competence, Armstrong (2010) uses an
approach essentially based on the difference existing between “hard” and “soft”
capabilities of an individual. He relates behaviour to competence, whereas technical skills
to competency.
Indeed, managers involved in the execution of this type of programmes also need to
decide whether to reward the use or the acquisition of competencies. Albeit it can be
definitely averred that emphasis should be put on the use, rather than on the mere
acquisition or expansion of competencies, whether this tenet would be restrictively
interpreted the implementation of competency-related pay could reveal as having neither
practical nor distinctive consequences vis-à-vis the execution of a performance-related
pay scheme (Armstrong, 2010). Making pay decisions exclusively taking into
consideration the final output or the results produced by individuals in fact might made it
pointless differentiating whether those results have been produced thanks to the
additional competency gained by an individual or otherwise. Once the individual level of
performance has been assed, whether considered appreciable and above average, this
can be rewarded accordingly; whereas it might be beside the point, at that stage, trying
to determine to what extent that performance level has actually been affected by the
employee competency. On the other hand it cannot be denied that it would also be
pointless rewarding individuals taking into account the competencies these have gained,
whether these have not produced any visible and appreciable result in practice.
Once again, the issue may apparently seem overly rhetoric, however, since, as we will
discuss later, measuring and assessing individual performance is everything but a
straightforward exercise to do, it is paramount that the firm’s management clearly
understand how to assess individual competency, vis-à-vis performance, in order to
make accurate and fair pay decisions.
To determine on which basis managers should made their decisions about individual pay
there actually is another significant element which needs to be considered, that is, the
identification of the main objectives employers want to pursue when deciding to develop
and introduce such a type of scheme. Employers introducing competency-related pay are
habitually keen to foster, encourage and favour the company human capital
development and individual vertical growth and provide evidence that the business need
and care for competence. The aim is, therefore, to ensure that individuals within the
business are given the necessary opportunity to extend their competence in order to be
able to perform well at the present time and in the future as well. Amongst the reasons
employers decide to introduce this type of scheme there is also that to ensure, the case
being, to the employees included into any given pay grade, progression within the same
grade without any need to promote these to a higher grade in the pay structure.
Some employers introduce competency-related pay in order to overcome the constraints
typical of the other types of reward schemes and because consider these plans more far-
reaching than systems focusing on performance output measurement only, such as
performance-related pay schemes (Neathey and Reilly, 2003).
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Whether employers want to avoid having recourse to such an approach as a substitute
for performance-related pay, these should avert to make pay decisions only on the basis
of the assessment of the final output produced by an individual. Differently, employee
expectations will remain unfulfilled and the introduction of the scheme will inevitably
result inconsistent and even in open contrast with the original intended aim.
The way competency should be matched with performance should rely on the real
reasons behind the individual output, that is, the fact that the employee has produced an
above-the-standard level of performance due to the competency he has gained and has
been able to effectively and successfully use. Managers’ decisions about individual pay
need hence to be based on the individual capability to extend his/her competence and
being able to effectively use this; which will ultimately lead to an increased level of
performance. Competency-related pay schemes should thus aim to reward individual
ability not only to gain competency, but also to effectively and properly use this in order
to ultimately quantitatively or qualitatively enhance their output level. Gain and use need
hence to necessarily coexist.
Explained in these terms competency-related pay arrangements would noticeably
resemble to contribution-related pay schemes. In order to keep its identity, the
mechanism of this type of pay arrangements should hence exclude any performance-
assessment involvement. Whatever, and according to the degree of, the role played by
performance measurement, this would lead to consider this type of pay arrangements as
a disguised performance-related pay scheme at worst or a contribution-pay scheme at
best. The mechanism of the purest of the purer competency-related pay schemes should
be essentially based on rewarding individuals exclusively on the basis of the competency
these gain, acquire and possibly use irrespective of the results they obtain.
These programmes should be thus seen and introduced as a form of investment for the
future; employers decide to care less for the present results putting emphasis and, to
some degree hope, on the future level of expected increased employee performance. It
is actually very unlikely that in practice employers could be genuinely interested in
developing and introducing such a type of pay arrangements, which very likely explain
the reason why this approach has not met the favour of a considerable number of
employers. Indeed, also in those cases in which a competency-related pay scheme has
been introduced, all too often it is not operated in its purest form.
It can finally be agreed with Zingheim and Schuster (2002) that pay arrangements
based on competency assessment, which would result even harder to measure than
performance, are essentially woolly and ambiguous.
Inasmuch as measuring performance is a very complex and uneasy task to perform for
managers, trying to measure and assess competency, especially whether a well-devised
and tested competency framework should not be operating within the organization, could
reveal to be a virtually impossible task to execute. Notwithstanding, the task would
clearly become harder whether it would not be crystal clear for the managers the
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meaning of the term competence or competency, which will be interchangeably used
thereafter.
Skill-related pay
Whereas the concepts of competence and competency are mainly associated with
individuals’ ability to improve and enhance their capabilities to more properly and
effectively carry out their current job, the concept of skill is mostly linked to the idea of
employees being able to quantitatively expand the range of their capabilities and abilities
in order to perform different types of tasks, duties and therefore works.
According to the mechanism of these pay arrangements an individual will receive a pay
increment whether this has gained new capabilities and skills enabling him/her to
perform an increased number of duties and works within the business.
Just like competency-related pay, skill-related pay represents an approach to base pay
centred on the individual, rather than on the job (Armstrong, 2010). Under this type of
schemes employees’ pay is in fact determined on the basis of the variety of tasks they
are able to perform due to the range of skills and capabilities these have gained, rather
than strictly on the basis of the level of pay associated with the individual relevant grade.
The use of this approach to pay can thus reveal to be particularly effective in conjunction
with broad-banded and career-family structures. In these cases pay progression through
the pay range of any given grade can be justified and sustained on the basis of objective
grounds, that is, the number of additional tasks an individual is able to perform.
Also in this case, however, a certain attention to the quality of the output produced by
employees cannot be completely overlooked. As such, skill-based pay arrangements can
enable employers, as in the case of competency-related pay, to grant individuals
consolidated pay progression within any given grade, averting to concede a grade or
level increase whether deemed unnecessary. The final aim is essentially that to reward
within the existing grade horizontal growth and by promotion to the upper grade vertical
growth.
The most compelling reason for introducing this pay approach, whether deemed
appropriate, is however represented by the increased level of flexibility it unquestionably
enables organizations to attain. The circumstance individuals within the business are
able to perform different tasks, and hence jobs, permits employers to better vary the
organization of work and to more effectively cope with the different workloads of the
various organizational units according to the possibly changing conditions. Never mind
the possibility this approach offers employers to find immediate internal solutions when
the need to cover for some individuals, who may be absent due to unforeseen
circumstances, should arise.
Skill-based pay should also effectually help employers fostering teamwork within the
business. Directly linked to this aspect is the likely circumstance that, by performing
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different works within the concern, individuals should be put in the position to better
understand the worthiness of their job and how this contributes to the attainment of
organizational success. Employees should thus be more willing to collaborate and better
understand how their activities relate with the activities carried out by the other
colleagues for the attainment of a mutual objective, that is, organizational strategy.
In contrast to pay arrangements based on competence assessment, which should
encourage vertical career, skill-based pay arrangements should provide individuals more
opportunities for horizontal or lateral career development. This could in turn contribute
to foster a multitasking and cooperative organizational culture, where individuals would
care and take initiatives for their horizontal development as a way to enhance their
working ability, favour personal growth, improve their marketability and effectively work
in team to yield better results.