Liz Hunter (Mazars) answers a query on considerations regarding the incoming gender pay reporting requirements on share plan awards.
Question
I am the finance director of a UK trading group of companies (private not quoted). Two of our companies employ more than 250 people but one has fewer staff. We operate an enterprise management incentive (EMI) plan to provide tax efficient share options to key senior management. We have also just allowed a new director to subscribe directly for new issue shares at a favourable price and this was not by way of an EMI option. What, if anything, do we need to consider regarding the incoming gender pay reporting requirements and will the calculations need to reflect any of the share plan awards?
Answer
While many are viewing the new gender pay reporting regime as a matter only for reporting accountants and employment lawyers, the requirements regarding share based payments mean there is a tax consideration aspect too, especially here in relation to the EMI options and direct subscription for shares by a director.
The requirements
The UK government published the draft Equality Act 2010 (Gender Pay Gap Information) Regulations 2016 as part of a consultation issued on 12 February 2016. The more detailed explanatory guidance was only recently published, on 6 December 2016. There is therefore very little time available for employers to fully understand their reporting obligations under the new regulations before 6 April 2017 commencement date.
Gender pay gap reporting will be made mandatory for private and voluntary sector employers (in England, Wales and Scotland) and for public sector employers (in England). The reporting is required for any of those employer entities with more than 250 ‘relevant’ employees.
A relevant employee means someone who ordinarily works in the UK, but also catches those performing duties outside the UK where their employment contract is governed by the UK. Companies should also seek advice in respect of the treatment for payrolled non-executive directors.
For employers which form part of a group (as here), reporting must be done on a per entity basis. As such, any company in the group with more than 250 employees will be required to report a separate position and a group headline position must also be reported. While some group entities may be obligated to calculate and report a pay gap, those employer entities with fewer than 250 employees can choose whether to report voluntarily or not at all. This may increase the resources required within groups of employers to ensure that reporting is done at the required levels.
The required reporting will cover three aspects:
the gender pay gap;
the gender bonus gap; and
salary quartiles.
The gender pay gap
This will relate to one particular pay period during the year, specifically based on the hourly pay rate for each employee during the pay period that includes 5 April. The difference in mean pay and median pay between male and female employees will be calculated by reference to the gross hourly rate of pay, i.e. before tax, national insurance, pension schemes and similar deductions.
‘Pay’ will include:
basic pay;
paid leave, including annual leave, sick leave and maternity, paternity, adoption or parental leave (except where an employee is paid less than usual because of being on leave);
area and other allowances (including car, on-call, stand-by and clothing allowances);
shift premium pay and pay for piecework; and
bonus pay (including commissions and some equity incentive awards).
It will exclude:
overtime pay and redundancy pay;
expenses and tax credits;
the value of salary sacrifice schemes; and
benefits in kind.
The gender bonus gap
Be aware that bonus decisions made prior to April 2017 will impact the reported position.
As bonuses can be a significant element of overall total remuneration, employers must separately publish the difference between mean and median bonus payments paid to men and women during the preceding 12 month period, i.e. the 12 months prior to the 5 April snapshot date for the gender pay gap calculation.
Frustratingly, this means that many calendar year end bonus payment decisions may have been taken before the further detailed guidance was published, despite such payments being part of the reporting calculations.
Employers who typically pay bonuses at the end of March may therefore wish to proactively revisit such arrangements; and, where possible, explore alternative payment dates, such that the bonus payments only fall into the bonus gap calculation and not also the gender pay calculation reference period.
Employers must also publish the proportion of male and female employees that received a bonus.
The bonus amount will be based on gross amounts. Employers therefore need to understand the point at which the bonus is recognised, i.e. when the employee becomes eligible, when it is paid, when it is earned, etc.
The regulations define ‘bonus pay’ as including ‘long term incentive plans or schemes’ and ‘the cash equivalent value of shares on the date of payment’. As such, share based remuneration is relevant to the calculation.
Salary quartiles
In addition to the gender pay gap calculated based on pay and bonuses, employers must also split their workforce into four quartiles based on their hourly pay rate. The quartiles must be of equal size in terms of employee numbers to identify concentrated areas by gender. This is particularly relevant as women have historically made up a significant portion of lower paid employees.
What does this mean for equity awards to employees?
The draft regulations confirm that ‘bonus pay’ includes ‘long term incentive plans or schemes’ and ‘the cash equivalent value of shares on the date of payment’. As such, any share based remuneration (in your situation, this includes the EMI option awards and the share subscription by a director) must be considered during the 12 month analysis period for ‘bonus’ payments.
It is currently proposed that only taxable income relating to equity awards will be considered for reporting purposes. This will mean that large amounts of data will be absent from the reporting, but also means that companies need to identify the relevant tax points and understand the tax treatment of different equity arrangements.
What should not require reporting
Reporting should not include:
the granting of equity awards, such as EMI (and other) share options or restricted stock units (RSUs), which do not provide a beneficial interest in the share from the outset and which therefore are not considered taxable income at that stage; or
share transactions under tax advantaged schemes (including EMI) where the plan remains compliant and statutory tax advantages result in no tax charges arising.
In the context of an EMI option, this means that an EMI option granted with an exercise price at least equal to the actual market value of the underlying shares, as agreed with HMRC at the time of grant, where the corporate group and participant have remained compliant with the EMI code (ITEPA 2003 Sch 5) requirements throughout the period from grant to exercise, should not need reporting.
What should require reporting
Reporting takes place at the taxable event (linked to a tax charge arising under ITEPA 2003) and therefore is likely to include:
When a taxable share option is exercised: This means income taxable events need to be identified, despite often occurring a number of years after the award. As employees will often have some discretion in terms of when to exercise the share options (unless the option is based on an exit only event), it will generally be expected that the exercise takes place when there is a liquidity event and the share price is high (so the employee unlocks share value gains since the date of grant). Where there has been exponential growth, the taxable amount could be very significant.
Discounted, disqualified and non-qualifying EMI options: Any EMI option granted with a discounted exercise price will fall into the reporting regime, as there will be a taxable income event when the option is exercised. This is also the case for an EMI option that is found to be non-qualifying (e.g. due to a failed notification of grant or some other defect that means the award is not compliant with the EMI legislative requirements). An EMI option (whether with a discounted exercise price or not) that has been the subject of a disqualifying event (per ITEPA 2003 Sch 5) may also fall into the reporting regime, unless the option has a market value exercise price and is compliantly exercised within 90 days of the disqualifying event. Sometimes an employer does not realise there has been a disqualifying event or that the option is somehow otherwise non-qualifying and a due diligence style health check review can be beneficial to make sure any latent issues are addressed, and where possible remedied, at the earliest opportunity.
When an RSU or other long term incentive award (whether under a UK or foreign parent plan) vests.
When officers/employees otherwise acquire employment-related securities at an undervalue: In your scenario, this means that the direct subscription for new issue shares by the new director, not under the auspices of the EMI plan, may give rise to a taxable event that would cause the share acquisition to be chargeable to income tax, reportable as part of the annual share plan compliance reporting and bring it within the gender pay reporting calculations also. The key determining factor will be whether or not the shares were acquired at an undervalue and you should note that this is a fair market value for tax purposes, which will take into account discounts for lack of liquidity and minority interests.
The above is not an exhaustive list and there are other considerations to take into account, particularly in terms of how forfeiture will be considered for reporting purposes and also how performance conditions and internationally mobile employees are treated (but such matters are outside the scope of this query and reply).
Action to take now
Action that can and should be taken now includes identifying the relevant and potential tax points, including checking for any latent disqualifying events under the EMI plan, as this is a risk area which is now likely to gain even more attention in terms of corporate transaction due diligence because of the potential wider impact under this new transparency framework.
Employers might take some comfort from the Court of Appeal decision in Hosso v European Credit Management Ltd [2011] EWCA Civ 1589, which denied a female employee an equal pay claim in respect of discretionary share option awards; however, it is important to note that the claim failed because there was no contractual entitlement. Employers should therefore, as a precautionary measure, meanwhile also ensure that equity awards are not linked to or regulated by the employment contract and that the way in which the employer determines awards (quantum and terms) is entirely discretionary, in order to minimise risk of claims when such female/male peer comparator reward data becomes more visible.
What else does the reporting mean for employers?
Measuring the gaps
To ensure greater understanding of the gender pay gap for employers and add greater depth to the analysis, two measures will be required for both the gender pay gap and the gender bonus gap:
overall mean: the average calculated by reference to the total pay (for male and female employees) divided by the number of employees (male and female); and
overall median: calculated by arranging pay figures in order from lowest to highest and taking the middle value.
The measures are expected to act as complementary indicators, as the mean will demonstrate if women continue to be over-represented at lower pay grades (and conversely men at higher earning pay grades), while the median will provide the typical difference as it is not affected by a small number of very high earners.
Publishing results
Once the calculations have been prepared and analysed, the results must be published on the corporate website and also uploaded to a government sponsored website. The results must be accompanied by a written statement confirming that the information is accurate with scope for a voluntary explanation of the results.
Key dates
The key dates for gender pay gap reporting are:
From April 2016: bonus data to be collected;
5 April 2017: preliminary data snapshot date;
4 April 2018: last date to publish first data;
annual reporting to be required thereafter.
Employers should also be aware that bonus pay data must be gathered between April 2016 and April 2017 and should already be taking steps to ensure that they have this information; and that any bonus decisions for April 2016 onwards are made in light of the new transparency framework.
Liz Hunter (Mazars) answers a query on considerations regarding the incoming gender pay reporting requirements on share plan awards.
Question
I am the finance director of a UK trading group of companies (private not quoted). Two of our companies employ more than 250 people but one has fewer staff. We operate an enterprise management incentive (EMI) plan to provide tax efficient share options to key senior management. We have also just allowed a new director to subscribe directly for new issue shares at a favourable price and this was not by way of an EMI option. What, if anything, do we need to consider regarding the incoming gender pay reporting requirements and will the calculations need to reflect any of the share plan awards?
Answer
While many are viewing the new gender pay reporting regime as a matter only for reporting accountants and employment lawyers, the requirements regarding share based payments mean there is a tax consideration aspect too, especially here in relation to the EMI options and direct subscription for shares by a director.
The requirements
The UK government published the draft Equality Act 2010 (Gender Pay Gap Information) Regulations 2016 as part of a consultation issued on 12 February 2016. The more detailed explanatory guidance was only recently published, on 6 December 2016. There is therefore very little time available for employers to fully understand their reporting obligations under the new regulations before 6 April 2017 commencement date.
Gender pay gap reporting will be made mandatory for private and voluntary sector employers (in England, Wales and Scotland) and for public sector employers (in England). The reporting is required for any of those employer entities with more than 250 ‘relevant’ employees.
A relevant employee means someone who ordinarily works in the UK, but also catches those performing duties outside the UK where their employment contract is governed by the UK. Companies should also seek advice in respect of the treatment for payrolled non-executive directors.
For employers which form part of a group (as here), reporting must be done on a per entity basis. As such, any company in the group with more than 250 employees will be required to report a separate position and a group headline position must also be reported. While some group entities may be obligated to calculate and report a pay gap, those employer entities with fewer than 250 employees can choose whether to report voluntarily or not at all. This may increase the resources required within groups of employers to ensure that reporting is done at the required levels.
The required reporting will cover three aspects:
the gender pay gap;
the gender bonus gap; and
salary quartiles.
The gender pay gap
This will relate to one particular pay period during the year, specifically based on the hourly pay rate for each employee during the pay period that includes 5 April. The difference in mean pay and median pay between male and female employees will be calculated by reference to the gross hourly rate of pay, i.e. before tax, national insurance, pension schemes and similar deductions.
‘Pay’ will include:
basic pay;
paid leave, including annual leave, sick leave and maternity, paternity, adoption or parental leave (except where an employee is paid less than usual because of being on leave);
area and other allowances (including car, on-call, stand-by and clothing allowances);
shift premium pay and pay for piecework; and
bonus pay (including commissions and some equity incentive awards).
It will exclude:
overtime pay and redundancy pay;
expenses and tax credits;
the value of salary sacrifice schemes; and
benefits in kind.
The gender bonus gap
Be aware that bonus decisions made prior to April 2017 will impact the reported position.
As bonuses can be a significant element of overall total remuneration, employers must separately publish the difference between mean and median bonus payments paid to men and women during the preceding 12 month period, i.e. the 12 months prior to the 5 April snapshot date for the gender pay gap calculation.
Frustratingly, this means that many calendar year end bonus payment decisions may have been taken before the further detailed guidance was published, despite such payments being part of the reporting calculations.
Employers who typically pay bonuses at the end of March may therefore wish to proactively revisit such arrangements; and, where possible, explore alternative payment dates, such that the bonus payments only fall into the bonus gap calculation and not also the gender pay calculation reference period.
Employers must also publish the proportion of male and female employees that received a bonus.
The bonus amount will be based on gross amounts. Employers therefore need to understand the point at which the bonus is recognised, i.e. when the employee becomes eligible, when it is paid, when it is earned, etc.
The regulations define ‘bonus pay’ as including ‘long term incentive plans or schemes’ and ‘the cash equivalent value of shares on the date of payment’. As such, share based remuneration is relevant to the calculation.
Salary quartiles
In addition to the gender pay gap calculated based on pay and bonuses, employers must also split their workforce into four quartiles based on their hourly pay rate. The quartiles must be of equal size in terms of employee numbers to identify concentrated areas by gender. This is particularly relevant as women have historically made up a significant portion of lower paid employees.
What does this mean for equity awards to employees?
The draft regulations confirm that ‘bonus pay’ includes ‘long term incentive plans or schemes’ and ‘the cash equivalent value of shares on the date of payment’. As such, any share based remuneration (in your situation, this includes the EMI option awards and the share subscription by a director) must be considered during the 12 month analysis period for ‘bonus’ payments.
It is currently proposed that only taxable income relating to equity awards will be considered for reporting purposes. This will mean that large amounts of data will be absent from the reporting, but also means that companies need to identify the relevant tax points and understand the tax treatment of different equity arrangements.
What should not require reporting
Reporting should not include:
the granting of equity awards, such as EMI (and other) share options or restricted stock units (RSUs), which do not provide a beneficial interest in the share from the outset and which therefore are not considered taxable income at that stage; or
share transactions under tax advantaged schemes (including EMI) where the plan remains compliant and statutory tax advantages result in no tax charges arising.
In the context of an EMI option, this means that an EMI option granted with an exercise price at least equal to the actual market value of the underlying shares, as agreed with HMRC at the time of grant, where the corporate group and participant have remained compliant with the EMI code (ITEPA 2003 Sch 5) requirements throughout the period from grant to exercise, should not need reporting.
What should require reporting
Reporting takes place at the taxable event (linked to a tax charge arising under ITEPA 2003) and therefore is likely to include:
When a taxable share option is exercised: This means income taxable events need to be identified, despite often occurring a number of years after the award. As employees will often have some discretion in terms of when to exercise the share options (unless the option is based on an exit only event), it will generally be expected that the exercise takes place when there is a liquidity event and the share price is high (so the employee unlocks share value gains since the date of grant). Where there has been exponential growth, the taxable amount could be very significant.
Discounted, disqualified and non-qualifying EMI options: Any EMI option granted with a discounted exercise price will fall into the reporting regime, as there will be a taxable income event when the option is exercised. This is also the case for an EMI option that is found to be non-qualifying (e.g. due to a failed notification of grant or some other defect that means the award is not compliant with the EMI legislative requirements). An EMI option (whether with a discounted exercise price or not) that has been the subject of a disqualifying event (per ITEPA 2003 Sch 5) may also fall into the reporting regime, unless the option has a market value exercise price and is compliantly exercised within 90 days of the disqualifying event. Sometimes an employer does not realise there has been a disqualifying event or that the option is somehow otherwise non-qualifying and a due diligence style health check review can be beneficial to make sure any latent issues are addressed, and where possible remedied, at the earliest opportunity.
When an RSU or other long term incentive award (whether under a UK or foreign parent plan) vests.
When officers/employees otherwise acquire employment-related securities at an undervalue: In your scenario, this means that the direct subscription for new issue shares by the new director, not under the auspices of the EMI plan, may give rise to a taxable event that would cause the share acquisition to be chargeable to income tax, reportable as part of the annual share plan compliance reporting and bring it within the gender pay reporting calculations also. The key determining factor will be whether or not the shares were acquired at an undervalue and you should note that this is a fair market value for tax purposes, which will take into account discounts for lack of liquidity and minority interests.
The above is not an exhaustive list and there are other considerations to take into account, particularly in terms of how forfeiture will be considered for reporting purposes and also how performance conditions and internationally mobile employees are treated (but such matters are outside the scope of this query and reply).
Action to take now
Action that can and should be taken now includes identifying the relevant and potential tax points, including checking for any latent disqualifying events under the EMI plan, as this is a risk area which is now likely to gain even more attention in terms of corporate transaction due diligence because of the potential wider impact under this new transparency framework.
Employers might take some comfort from the Court of Appeal decision in Hosso v European Credit Management Ltd [2011] EWCA Civ 1589, which denied a female employee an equal pay claim in respect of discretionary share option awards; however, it is important to note that the claim failed because there was no contractual entitlement. Employers should therefore, as a precautionary measure, meanwhile also ensure that equity awards are not linked to or regulated by the employment contract and that the way in which the employer determines awards (quantum and terms) is entirely discretionary, in order to minimise risk of claims when such female/male peer comparator reward data becomes more visible.
What else does the reporting mean for employers?
Measuring the gaps
To ensure greater understanding of the gender pay gap for employers and add greater depth to the analysis, two measures will be required for both the gender pay gap and the gender bonus gap:
overall mean: the average calculated by reference to the total pay (for male and female employees) divided by the number of employees (male and female); and
overall median: calculated by arranging pay figures in order from lowest to highest and taking the middle value.
The measures are expected to act as complementary indicators, as the mean will demonstrate if women continue to be over-represented at lower pay grades (and conversely men at higher earning pay grades), while the median will provide the typical difference as it is not affected by a small number of very high earners.
Publishing results
Once the calculations have been prepared and analysed, the results must be published on the corporate website and also uploaded to a government sponsored website. The results must be accompanied by a written statement confirming that the information is accurate with scope for a voluntary explanation of the results.
Key dates
The key dates for gender pay gap reporting are:
From April 2016: bonus data to be collected;
5 April 2017: preliminary data snapshot date;
4 April 2018: last date to publish first data;
annual reporting to be required thereafter.
Employers should also be aware that bonus pay data must be gathered between April 2016 and April 2017 and should already be taking steps to ensure that they have this information; and that any bonus decisions for April 2016 onwards are made in light of the new transparency framework.
