Company Share Options, Save As You Earn

Saving as you Earn – How quaint
If you work for a larger company you might be given the chance to participate in a Save As You Earn (“SAYE”) scheme.

You’d be offered the opportunity to plump for somewhere between £5 and £500 a month for the next 3 or 5 years (or maybe even 7).  Then you could use the accumulated funds to buy stock in the company at a fixed option price.  Ermine has a nice post on the subject that’s worth a read.

Your risk averse muscles may start twitching at this and rightly so, give them a pat.  In order to see any of the potential gains you have to lock up your hard earned cash for years.  Not only that, you are tied to the company for those years as well.  If you leave, you leave the options behind.  There’s nothing to stop you leaving and taking the cash with you, but you lose any right to the options.

So that’s potentially £500 a month that is otherwise unavailable to invest elsewhere and a drag on you should you wish to move jobs.

If you do stay the term you could be left with a substantial pot of cash to use on options.

The scheme will offer you the option to purchase shares at some point in the future at a fixed price.  The point in the future is fixed at the outset, somewhere between 3 and 5 years, as is the option price.

“Hmmm, an option, hey?  What is this financial wizardry?”

An option gives you the choice to purchase shares at a fixed point in the future, but importantly not the obligation to.  So the power is in your greedy wee hands.

The option price
At the start of the scheme the company will set the option price based on the companies current share price.  This is fixed from the start of the contract and represents the price that you can buy shares for at the end of the scheme.

The real kicker comes in the form of a potential discount, the company can offer you the options with up to a 20% discount to the market value.

An example
Let’s say you are working for Dream Smasher Plc, which has a current share price of 100p.  They offer you the chance to enter into a 3 year SAYE scheme, with the full 20% discount.  So you’ll have an option price of 80p.  Feeling bullish, you opt for the full £500 a month.  Where does this leave you in 3 years time?

Contributions into scheme – £500 x 12 x 3 = £18,000

At the end of the three years you will be asked whether or not you want to exercise the options, i.e. use your £18,000 to buy shares at the option price or not.  This will all depend on what the share price has done in the mean time.

Share price at 70p – below our option price of 80p
Your options would be worth £18,000 x (70/80) = £15,750.
Cash is worth £18,000.

Because the option price is less than the current market value you would lose £2,250.  If you really wanted the shares you would be better just taking the £18,000 in cash and buying shares at 70p, rather than the option price of 80p.

Share price at 90p – between our option price of 80p and the initial MV of 100p
Options would be worth £18,000 x (90/80) = £20,250.
Cash is worth £18,000.

So even though the share price has tanked a little bit over the three years, you would still have made a gain of £2,250.  Good work.

Share price at 115p – in excess of both the option price of 80p and initial MV of 100p
Options would be worth £18,000 x (115/80) = £25,875
Cash is worth £18,000

Taking the options here would get you a nice gain of £7,875.  Much in excess if we had bought the shares at 100p, for a gain of £2,700.

That is a gain of £7,875 / £18,000 = 43.75%, or 12.86% annualised, right?  Well, not quite, because not all of the £18,000 was invested at the start of the scheme.  Only the first £500 has been invested for 3 years, the rest for less, with the last only being invested for a month.

It actually works out as just under a 25% annual return for an increase of 15% in the MV of the share!  Holy shitballs, not bad.  The reason it works out so high is due to the later months.  Looking at the last month we are investing £500 to buy options at 80p.  In a months time we can use this £500 to buy shares worth 115p, for only 80p.  In a month the £500 grows to nearly £720.  So a gain of nearly 44% in the month, which annualised is in excess of 7,500% ( approx [1.44^12]-1).  W00t.

Now, this might appear as playing about with numbers, for numbers sake.  And indeed the gain in the last month is meaningless really, as you need to look at the scheme as a whole.  But it does provide some indication of how powerful these schemes can be.

Power to the Option
Power of the option in my crusty undead eyes;

1 – optionality itself.  It let’s you invest in a company, without the fear of the market value dropping.  If it comes to the end of the term and the market value has tanked, no big deal, you just take the cash.  Admittedly you might have lost out on gains else where, but not as much as you would have investing in the company shares from the start.

2 – the discount.  Even if the shares drop a little you can still make money if it’s above the option price.  If the stock price does increase in value then you stand to make even more.

3 – tax benefits.  Your scheme may offer you a small tax free bonus on your cash at the end of the term, but it’s not likely to be significant.  The bonus on mine is around 1%.  The income on exercising the options is not subject to National Insurance or income tax, which is nice.  The Capital Gains Tax get’s a little confusing, but I think if you transfer it straight into ISA you won’t be liable for that portion, Equiniti seem to think that’s possible.  You’d have to do pretty well to breach the CGT limit, but still worth thinking about.  SAYE is deducted monthly from your salary, sadly after tax.

Drawbacks of the option
The suspicious Zombie always considers the drawbacks as well;

1 – you and your money are tied up.  Your money is locked-up for the period that the scheme runs for, if you want the options at the end of it.  This can make you feel tied to that company, and perhaps even delay moving job.  So this is your job and a substantial amount of savings being tied into the fate of one company.  Nice diversification there, buddy.

2 – tax efficiency – it’s not the most tax efficient way to save.  If you are saving the £500 a month you are almost certainly going to breach the ISA limit at the end of the term.  And if you are a saving martyr then you are probably maxing out your ISA allowance on top of this anyway.  But there is the potential for the gain to be in excess of tax inefficiencies.

How to include in your Net Worth
I reckon there are three ways to include the options from a SAYE scheme in your Net Worth.

Include at the value of the share price, with a floor set at the option price
This way we are reflecting the value as if we could exercise the option now, but recognising if the price drops below the option price we would take the cash.

Include as cash plus an option valuation
If we were so include we could value the option, typically using some closed formula approach like Black-Scholes.  But this would involve estimating the volatility of the under-lying share and it could get a bit messy.

Cash plus the option valuation would be added to Net Worth.

Interesting, if you have the time.

Include as cash
The simplest and most prudent approach.  Admittedly this will result in a step up in your Net Worth should you exercise the options.

What to do
I just include the cash value of mine, mainly out of laziness.

I have been meaning to add an option valuation to see what it would look like, but it would probably just add more volatility to my New Worth.  Besides, Zoopla seems highly capable of adding all the volatility I need in my property value.

Are they worth it?
As your only form of saving, it seems fairly risky.  It’s easy to get blinded by the potential gains.  At the end of the day it is dependent upon the performance of one share price, and that’s it.  Contributing to a pension/ISA in the first place, in a diversified way, should be a prerequisite in my opinion.

I’ve lumped up for the full £500 a month into mine, into two different SAYE schemes.  At the moment they are both showing some sexy gains.

But that’s by luck rather than judgement, the share price could easily be down and I could be paying £500 a month into worthless options, just waiting for the price to recover.  Some of the schemes here didn’t to do well.

I’m happy with the SAYE scheme, as I’m lucky enough to be in profit.  And after they mature I would probably stump up for another term, perhaps not for the full £500 though.  I imagine I will time it just as a crash is around the corner.

Any thoughts on these schemes?

Mr Z

[And if you’re thinking about investing in your companies SAYE scheme, get some advice.  Don’t take a guy who pretends to be a zombie’s advice.  Common sense, right]

16 thoughts on “Company Share Options, Save As You Earn

  1. EarlyRetirementGuy

    Big fan of these schemes as they seem pretty risk proof. The only real disadvantage is that the money is unavailable to be used for other things.. But then the same could also be said for pensions and mortgage over-payments.

  2. weenie

    All the best with the scheme Mr Z – I have to say, if this was offered by my company I would definitely sign up.

    Instead, we have a share scheme – you buy shares and the company gives you an extra 14% of your purchase (and fractions of shares are allowed).

    Yes, your money is tied up but as with other long term savings/investments, you should only be putting in cash that you can afford to put aside and ensure you have other more liquid funds should you require.

  3. Cerridwen

    It does sound a very good deal as part of a balanced set of assets. Good luck with it all. 🙂

    (Never had the chance to join any of these schemes myself as I've always worked in the public sector.)

  4. ermine

    I think you're damning by faint praise 😉

    Where else, exactly, are you going to go to get a one-way bet on shares in your favour?

    > you and your money are tied up. Your money is locked-up for the period that the scheme runs for, if you want the options at the end of it.

    Certainly with my company scheme you could get your money back at any time, so liquidity isn't a huge issue.

    Sharesave is awesome. JFDI 😉 In cases where you're offered a five year or a three year scheme favour the five years schemes (assuming you anticipate being there that long!) to maximise time in the market, and diversify across time-slots

  5. Dividend Drive

    I have not been part of the SAYE scheme since–oddly enough–Tesco. Mostly because I have not worked for a company (rather than an institution) long enough since then!

    In the Tesco case, however, I was fortunate as I was out of the scheme (and their normal share scheme) in 2008/9. Made a very nice amount of money, it must be said. I was a humble student then and it was–as you can imagine–very much appreciated.

    I think you're right though. These schemes can be very valuable as long as they form part of a larger "investing universe." By themselves they are a little risky from a personal sense.

    Great post though. Thanks for writing it up so thoroughly!

  6. M from There's Value

    i'm a huge fan of these schemes too. unfortunately never earnt enough to justify them as was only doing part-time through school and uni with the big companies that offered them… so my tuppence ha'penny pay packet every thursday would be wiped out by shares anyway! Hopefully in the future I would love to take part if I ever work for a large company with an SAYE scheme again.

    Love all the calculation work you put into it, very important to note the length of contributions very similar to a regular saver account where not all your money is tied up all the time, but dripping in part way through the years.


  7. Mr Zombie

    Hi ERG,

    That's a fair point on the mortgage and pensions. Would have to agree they are pretty risk proof, a small default risk on the company. But generally would think this is very small

    Mr Z

  8. Mr Zombie

    Hi Weenie,

    Like I say, mine is going pretty well, so I can't complain 🙂

    We have a share scheme as well, it's slightly different and capped at a pretty small amount. Still, it's 'free money' in the extra %, so I'm in that too.

    True, piling into one of these as your only form of saving would be brave and stupid 🙂

    Mr Z

  9. Mr Zombie

    Thanks Cerridwen.

    I did have a look at the historic issues by the company, and they had all been badly time, so not many made much!

    They are on offer to all employees but still so many do not take them up…

    Was there any kind of 'incentive' program you ever saw?

    Mr Z

  10. Mr Zombie

    Hi Ermine,

    I think you are right 🙂 [perhaps indicative of the fact that I want to leave as soon as I am ready, haha]

    They are a very nice perk. I have seen a few people turn down job offers to wait until the schemes have matured, so they can be a tie. But mine is the same, there's nothing to stop you getting your cash out (although no idea how quick it is)

    – From your article -> "For this to be any use to you you need to be a worker drone in a company that is listed on the London Stock Exchange" – yep, that's got me covered. And I agree on getting out as soon as the options mature, take the shares and the profit.

    I like the idea of spreading across the various issues. Although mine has only ever been offered over 3 years and there was a period where they stopped it. It seems to have resumed it's annual appearance now though.

    Mr Z

  11. Mr Zombie

    Hola M,

    They are a nice incentive to stay working in a cubicle for a little bit longer, ease the pain so to speak!

    Yeah, I was surprised about the gains if you look at it like that. Perhaps a little misleading, but nice 🙂

    Mr Z

  12. sparklebeeblog

    ShareSaves!!! These are brilliant! They are a win-win – or have been for me over the years. I was lucky to work for a FTSE100 company that offered these and they have paid off handsomely over the years. If you are working for a good company then it is very likely that the share price will rise and so after 3 or 5yrs you can either exercise & sell immediately and take the profits (CGT permitting), hold onto them and sell in later tax years and pick up dividends in the meantime.
    I have been fortunate as this has been a big factor in my ability to achieve my FI targets. They have helped me pay off my mortgage and diversify by selling and buy other company shares.

    I have never passed one up when it was offered. I did them as a trickle (some every year – dividing the max allowance up so every year I had some shares mature). You can put the max allowance in one and wait for it to mature but by dividing it up, it meant I could spread the sales across tax years and remain within the CGT allowances. I had 3 schemes on the go running over 3 yr terms and trickling out the profits each year. It meant I knew that each year I had a small return so if the cubicle working became too much I could exercise and leave and cash in the other 2 active schemes — OR if you are made redundant / have the company sold off — you can exercise them early and pick up shares based on the funds already saved in the account.

  13. sparklebeeblog

    "Want to get your cash out?"
    Depends on who the company is that is operating the Sharesave scheme. Yorkshire Building Society ran the ones I was involved in and they paid out within 15 days of closure.

  14. Mr Zombie

    Hi sparklebee,

    Whoa! That is a glowing review of SAYE schemes 🙂 Awesome work! My second tranche is earmarked for mortgage overpayment.

    Spreading them out does seem like a good idea, and I have done it by mistake really as I couldn't afford the whole amount on the first one.

    Didn't realise that about the redundancy. Is that a standard thing or specific to your scheme? Will be doing some reading tomorrow I think.

    Mr Z

  15. Huw

    Hi Mr Z,

    I'm catching up on old posts currently, but I had to drop my pennies worth on this one.

    First of all, great job done on explaining Company Share Options. I wish I had read this prior to mine numerous years ago.

    I, like all of the comments above, are strongly in favour of them.

    I joined a 3 year scheme and maxed out the £250 limit we were given at the time. the 20% reduced rate was £2.02 per share, and 2.5 years into the scheme our company was purchased by another for £4.32. We also had an option to continue paying in our £250 for another 6 months, which was the easiest financial decision I've ever made in my life and I ended up doing very well from it!

    That success actually lead me into Index investing and eventually DGI, so I'm eternally grateful for it's contribution both financially and psychologically.

    I hope you get the same joyous experience. Good luck!



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