A share option scheme gives employees the right to purchase company shares at a predetermined price (the exercise price) at a future date, subject to vesting conditions. In the UK, tax-advantaged schemes like EMI, CSOP, and SIP offer significant tax benefits. Share options align employee and shareholder interests by giving staff equity upside.
In Depth
Share option schemes are a cornerstone of compensation strategy for growth companies. They enable businesses to offer meaningful equity participation to employees, creating alignment between staff and shareholders while managing cash outflows.
The main UK tax-advantaged share option schemes are: EMI (for smaller companies, up to £250K per employee), CSOP (Company Share Option Plan — up to £60K per employee, broader eligibility), SIP (Share Incentive Plan — free, partnership, and matching shares with various limits), and SAYE (Save As You Earn — a savings-linked scheme).
Non-tax-advantaged (unapproved) options have no statutory limits but result in income tax and NI charges on exercise, making them less attractive for employees.
For FP&A teams, share options create several modelling requirements. The P&L impact: IFRS 2 and FRS 102 Section 26 require a share-based payment expense calculated using option pricing models (typically Black-Scholes) and spread over the vesting period. Dilution: outstanding options increase the fully diluted share count, reducing diluted EPS. Cap table management: tracking grants, exercises, lapses, and the total dilution to existing shareholders.
The share-based payment charge is a non-cash expense, so it is added back in EBITDA and free cash flow calculations. However, it represents real economic cost — the dilution to existing shareholders — and should not be ignored in performance analysis.
Real-World Example
A UK company operates an EMI scheme with 5M options granted at 80p exercise price (current market value). Using Black-Scholes with 40% volatility, 4-year vesting, and 4.5% risk-free rate, the fair value per option is 35p. Total share-based payment charge: £1.75M spread over 4 years (£437.5K per year). The FP&A team reports adjusted EBITDA (adding back the SBP charge) alongside statutory EBITDA, with clear reconciliation between the two.
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