Share Options Vs Salary

Question

In my current role my base salary is well below market value for my experience and responsibility. Ive also been awarded some share options and pay in to a share save scheme at the same time.

I have been awarded shares with the value of around 28000 at the current market value and paying in to a the share scheme at £8 a share where the current value is actually around 16 and is projected to rise. To be able to access the awarded shares I will need to be employed at the company for another 2 years and if I resign ill lose them and only get back the money I have payed in to the share scheme. If all shares matured at the current rate id look to lose around 40k.

I've been talking around to recruiters both in recruitment firms and directly at the companies hiring and it seems reasonable I could be making around 35k more per year pre tax. It seems to me that its realistically going to take a fair while in a better paying role to make up for the lost money but at the same time it would (hopefully) be a more permanent rise in income.

I was just hoping to see if anyone had any advice they could give that would allow me to make the most informed decision possible.

TIA

Answer 1

I am going to make a few assumptions

• You are currently earning less than £50,000 per annum putting you in the basic tax band of 20% https://www.gov.uk/income-tax-rates

• That after the proposed move and new salary you will be earning more than £50,000 per annum putting you in the higher tax rate of 40%

• I am ignoring other taxs, reliefs etc that may be due or available

• Based on statements that the share options are worth £28,000, that the purchase price is £8.00 and the current price is £16.00 that you have 1,750 shares all purchased in one year

Not moving Jobs

Year 1

• Salary of £40,000, Personal allowance of £12,500 and basic tax of 20% gives you a take home pay of £34,500 (( (40,000-12,500) *.80) + 12,500)
• No earnings from shares

Year 2

• Salary of £40,000, Personal allowance of £12,500 and basic tax of 20% gives you a take home pay of £34,500 (( (40,000-12,500) *.80) + 12,500) with no earnings from shares
• No earnings from shares

Year 3

• This year you have 1,750 shares to sell

• Sold 1,750 shares for £28,000 with sales price per share of £16 and a purchase price of £8. This gives a gain of £14,000 which is taxable. But you have A Capital Gains Tax Free Allowance of £12,300 leaving £1,700 which is taxable. As you are on the basic tax this £1,700 should be added to your taxable salary of £40,000

• Salary of £40,000, Personal allowance of £12,500, Profit from shares of £1,700 and basic tax of 20% gives you a take home pay of £48,160 (( ((40,000+ 1,750)-12,500) *.80) + 12,500 + 12,300).

Total Take home pay of £117,160 over three years

Moving Jobs

Year 1

• Salary of £70,000, Personal allowance of £12,500 and basic tax of 20% on the first £40,000 and higher tax of 40% on amounts over £40,000 this gives you a take home pay of £52,500 ((((40,000-12,500) *.80) + 12,500) + ((70,000 - 40,000) * .60))

• No earnings from shares

Year 2

• Salary of £70,000, Personal allowance of £12,500 and basic tax of 20% on the first £40,000 and higher tax of 40% on amounts over £40,000 this gives you a take home pay of £52,500 ((((40,000-12,500) *.80) + 12,500) + ((70,000 - 40,000) * .60))

• No earnings from shares

Year 3

• Salary of £70,000, Personal allowance of £12,500 and basic tax of 20% on the first £40,000 and higher tax of 40% on amounts over £40,000 this gives you a take home pay of £52,500 ((((40,000-12,500) *.80) + 12,500) + ((70,000 - 40,000) * .60))

• No earnings from shares

Total Take home pay of £157,500 over three years.

Disaster Scenario - Fired After Two Years then a new job for one year

Year 1 Salary Not Moving Jobs

- £34,500

Year 2 Salary Not Moving Jobs (Fired at end of Year 2)

- £34,500

Year 3 Salary Moving Jobs

• £52,500

Total Take home pay of £121,500 over three years.

So over three years the new job with a higher salary appears to give you a higher take home salary.

D

Answer 2

By not moving jobs, the grant of share options ties your financial success to company performance (where for this purpose success is measured by an increased share price).

A successful, rapidly growing business could see its share price move far beyond its current £16 value.

It is conceivable that the share price climbs to £100 or £1,000 or even £10,000. That would be worth much more than changing to another company without such an opportunity.

Let's say you were fortunate enough to see a share price of £1,000 per share when you reach the date where you can exercise your options. 1,750 shares at a capital gain of £992 would get you £1.736 million before tax deductions. Probably not many businesses will grow that much, but some do.

Do you want to work for a known salary or do you want to take the chance that your current role is in a business that can grow significantly in 3 years?

The choice is obviously yours but things you might consider are your own risk propensity, how much difference you can make relative to others working there, how well the business is run and how compelling their product/service is.