In the current environment, the value of share schemes and how you choose to reward your key staff, particularly management teams, will be raising questions in boardrooms of firms across the UK’s middle market.

• Are our options underwater?
• Are our performance targets likely to be met in the current environment
• Will our current plans meet our objectives of retaining and incentivising our people in the medium term?

A well thought-through remuneration strategy is key in helping a business to meet its commercial objectives.  It allows a business to recruit the right people and to motivate, direct and retain them.  In today’s environment however, can you be sure that your remuneration package is still appropriate for your business?

Assessing whether your remuneration policy is appropriate is vital to ensure:

• Alignment with your business strategy
• You are competitive in the market
• In line with “industry best practice”
• Sufficiently flexible

Keeping cash in the business?

As the liquidity markets are near dry, all businesses should be focused on cash management and keeping vital cash in the business.  In working with many FTSE SmallCap and AIM companies we have found that companies are still using market value options as part of their executive remuneration package.  However, as stock markets across the globe rise and fall, these could potentially be worthless.  We have seen several clients where their plans are at risk of underwater option and worked with them to identify scope for surrender and re-grants and manage the potentially tricky accounting issues, thereby reinstating the value and effectiveness of equity incentives as a retention and incentivisation tool.

An additional consideration with underwater options is the potential ability to claim a corporation tax deduction where the company has suffered IFRS 2/FRS 20 ‘share based payments’ profit and loss charges.  The current accepted corporation tax treatment in respect of share options awarded to employees has been to disallow the IFRS 2/FRS 20 ‘share based payments’ profit and loss chargefor tax purposes and subsequently claim a corporation tax deduction (under Schedule 23, FA 2003), equal to the charge to income tax on the employees when the options are exercised provided certain conditions are met.  Where share options have vested (i.e. become exercisable under the rules of the option scheme) but are not exercised by employees because, for example, the share price has fallen, there would be no corporation tax deduction for these awards.  However, we believe there is an opportunity for companies to claim the related profit and loss charge under IFRS 2/FRS20 as tax deductible.  This follows the basic principle that the corporate tax treatment follows the accounting treatment unless there is specific tax legislation or tax case law to the contrary. 

Circumstances where such claims may be possible are, for example, where:

• Your company has share option schemes which have vested but the options have/are likely to then lapsed without being exercised due to share options being underwater as a result of falling share prices; 
• Awards have failed to vest due to the non satisfaction of market based performance targets such as TSR; or
• Share options were exercised in any of your portfolio companies but no corporation tax relief was available due to the relevant conditions not being met at the time share was acquired;

This is an area that companies are increasingly reviewing and it should be given due consideration if your company is affected by underwater options and failing performance targets.

Vanessa Cundy-Cooper is a Director in KPMG's Reward team and is involved in designing and implementing equity arrangements and advising on valuation and accounting under IFRS 2/FRS20. Vanessa has managed executive compensation and strategy projects for clients in a wide range of industry sectors including FS, transportation, telecommunications, biomedical, chemicals, software and retail.