Huge Surprise!

Britain\’s leading companies are devising pay schemes that enable top executives to escape the new 50p rate of income tax for high earners that takes effect in April, the Guardian has learned.

Really, who would have thought it?

The details look rather interesting though:

A number of pay plans are currently on the drawing board and differ subtly from the current schemes used in Britain\’s biggest boardrooms. Many of them seek to re-classify executives\’ income as capital gains, which attract a lower tax rate.

Most pay schemes for FTSE 100 executives are currently based on awards of shares or options that are linked to performance criteria over three to five years. The income tax is paid when the shares or options actually \”vest\” (when the executive gains control of them).

But the new schemes being drawn up are based on a system known as restrictive stock. These seek to shift most of the tax liability to a capital gain on any profits made at the end of the three- to five-year period when the shares vest.

They use complicated financial instruments to minimise the income tax paid by the director when the stock is received and transfer some of the economic risk to the executive.

There is, of course, no such thing as a free lunch. So (assuming The G has got these details rioght, on tax matters not a given), in order to move this from income to capital gain there has to be an assumption of some economic risk by hte recipient.

In effect, the options vest into restricted stock which must be then held for a few years.

And this is something we\’d rather like to happen anyway. We like restricted stock, we like tying the payment for performance now to how that performance plays out over the next few years….rather, than, say the effect of accounting highjinks on next reporting period\’s profits.

It\’s going to be interesting seeing the reation of the usual suspects. Which emotion will win out? Anger that they\’re trying to avoid tax or a welcoming of the tie between pay and long term performance which they also campaign for.