The year that awards from Long Term Incentive Plans and other deferred remuneration arrangements are “for”
Entry to Long Term Incentive Plans (LTIPs)If employees perform exceptionally well, they may be invited to participate in an LTIP. LTIPs run for pre-determined period that can be as long as 10 years. This process may repeat year after year so that employees are simultaneously members of several Plans. In any particular year they may receive part awards from some and entire awards from others.
The initial investment is often funded by part of the participant’s bonus for the previous year. The employee may be obliged to defer all or part of the previous year’s bonus or may do so voluntarily. Plans may require a mixture of the two. The initial contribution may be guaranteed, in the sense that it cannot be lost, and/or it may have the potential to increase and decrease dependant on what the Plan tracks, for example, share price or company turn- over.
Other plans, particularly phantom share schemes, may simply award notional stock without any requirement for deferral from an earlier bonus.
In addition to the anticipated growth in the share price that adds value to the participants’ awards, employers may make additional awards of stock to increase the value of the notional portfolio. These “matching awards” may be granted throughout the life of the scheme at times specified in the plan document.
Deferred bonuses and matching awardsEmployers may defer the payment of bonuses and make eventual payment subject to conditions. For example, the employer awards a bonus of £100,000 referenced to a performance period. £75,000 is paid in cash immediately following the bonus year; £25,000 is to be paid three years later in cash or shares, if the employee has not resigned or been dismissed before the vesting date. Such a deferral may be imposed by the employer, or it may be entered into voluntarily by the employee. To develop the example, the £25,000 deferral may be required by the employer but the employee has the choice of voluntarily deferring a further £25,000. In both scenarios, the employer may offer an enhancement or matching award. The matching award may be delivered in the form of shares or cash. The matching award may be added to the LTIP at the beginning of the period. Additional matching awards may be added at specified dates during the deferral or vesting period.
What year are LTIP awards “for”?It is important to consider all of the relevant facts. The deferred bonus may be “for” the original bonus year, or for the whole deferral period. If there is particular emphasis on the employee remaining in service at a future date, it may be for the tax year in which that condition is met. However, this feature is unlikely to exist in isolation as the employer wants to motivate the employee to perform well while remaining in employment. In order to determine the period that the deferred bonus is “for”, it is necessary to consider all of the relevant information and weigh the emphasis given to each factor.
In general terms, simple deferred bonuses will remain earnings for the original bonus period, and growth or matching awards will be “for” the deferral period. In more sophisticated schemes where the deferred bonus is “awarded” and “vests” after the bonus year, and especially where there are further performance conditions relating to this period, the deferred bonus may be earnings for the period between award and vest.
There may also be circumstances where “growth” in the value of the fund is treated as being “for” the performance period of the original deferred bonus. This view is likely where no additional performance criteria are imposed during the deferral period or, if there are, the conditions are the same as for the deferred bonus.
If the conditions are significantly different, e.g. the matching awards are conditional upon new performance criteria, the “growth” or matching awards are likely to be “for” the deferral or vesting period itself.
If the conditions of the matching award are referenced solely to the employee remaining in employment on the vesting or payment date in order to receive payment, the matching award is likely to be earnings for the tax year in which entitlement to receive the award matures.
Enhancements or matching awards may be paid out of LTIPs at the same time as deferred bonuses. Awards may be aggregated amounts that are “for” different periods. It is important to understand how sums are calculated and whether different performance periods should be considered.