Share Incentive Plan Calculator

Share incentive plan calculator is developed on simple mathematics calculation formulas that help employees to calculate estimated Partnership Shares, Matching Shares, Dividend Shares, Total Shares After Reinvestment, Total Value After the Holding Period, Tax Savings, and Total SIP Benefit, with a graph that shows data from the basis of your inputs.

It might be received from participating in a company’s Share Incentive Plan (Scheme). Below is the complete explanation of this tool and how it works and is calculated.

Share Incentive Plan (SIP)

Share incentive plan that’s called in brief (SIP). It is also called an employee share ownership plan. that is provided for every employee by companies or employers, It helps to acquire and invest in direct company shares with some efficiency benefit of tax. Every company is offered this share incentive plan typically as a compassion for their employees to keep motivating their employees, Which encourages them to work in companies for a long time.

It works in different types depending on various companies’ rules and terms. but in every condition, it is always beneficial for an employee.

Through the share incentive plan, (SIP), employees can directly invest in their employer’s shares and benefit from potential growth in the company’s value.

Key Components of the SIP:

1. Partnership Shares (PS): These are shares purchased by the employee using their contribution.
2. Matching Shares (MS): These are shares given to the employee by the employer, usually matching the number of partnership shares, based on a specified matching ratio.
3. Free Shares: These are additional shares given to the employee by the employer without any cost.
4. Dividend Shares (DS): These are shares acquired by reinvesting dividends received on the shares held.
5. Total Shares After Reinvestment: The sum of all the shares owned by the employee after reinvesting the dividends.
6. Total Value After Holding Period: The estimated total value of the shares after a specified holding period, based on the estimated share price at the end of this period.
7. Tax Savings: The savings from income tax and National Insurance contributions due to the tax-free treatment of the Partnership Shares.
8. Total SIP Benefit: The total monetary benefit the employee receives from the SIP, including the value of shares and tax savings.

Formulas Used in the SIP Calculator:

1. Partnership Shares (PS):

Partnership Shares = Employee Contribution​/Share Price at Purchase

Explanation: This formula calculates the number of shares an employee can buy with their contribution. For example, if the contribution is ₹1,000 and the share price is ₹10, the employee can purchase 100 shares.

2. Matching Shares (MS):

Matching Shares=Partnership Shares×Matching Ratio

Explanation: This formula determines how many additional shares the employer will provide. If the matching ratio is 1:1, the employer will match the number of partnership shares one-to-one. For example, if the employee buys 100 shares and the matching ratio is 1, the employer gives an additional 100 shares.

3. Dividend Shares (DS):

Dividend Shares=Share×Total Initial Shares​/Share Price at PurchaseDividends per 

Explanation: This formula calculates the number of additional shares the employee can acquire by reinvesting the dividends they receive. The total initial shares are the sum of partnership shares, matching shares, and free shares. For instance, if the total initial shares are 150, the dividend per share is ₹1, and the share price is ₹10, the employee can buy 15 additional shares with the dividends.

4. Total Shares After Reinvestment:

Total Shares=Partnership Shares+Matching Shares+Free Shares+Dividend Shares

Explanation: This formula sums up all the shares the employee owns after reinvesting dividends. It gives the total number of shares held at the end of the period.

5. Total Value After Holding Period:

Total Value=Total Shares×Estimated Share Price at End of Holding Period

Explanation: This formula calculates the estimated market value of all the shares after the holding period, based on the expected share price at that time. For example, if the total shares are 200 and the final share price is ₹15, the total value will be ₹3,000.

6. Tax Savings:

Tax Savings=(Partnership Shares×Share Price at Purchase×Income Tax Rate)+National Insurance Savings

Explanation: This formula estimates the savings on income tax and National Insurance contributions due to the tax-exempt status of Partnership Shares. For example, if the partnership shares are 100, the share price is ₹10, and the tax rate is 20%, the tax savings will be ₹200 plus any additional savings from National Insurance.

7. Total SIP Benefit:

Total SIP Benefit=Total Value After Holding Period+Tax Savings

Explanation: This formula calculates the total financial benefit to the employee, which includes both the market value of their shares after the holding period and the tax savings they received. For instance, if the total value after the holding period is ₹3,000 and the tax savings are ₹200, the total SIP benefit is ₹3,200.

Example Calculation:

Let’s assume the following inputs:

• Employee Contribution: ₹1,000
• Share Price at Purchase: ₹10
• Matching Ratio: 1
• Number of Free Shares: 50
• Dividends per Share: ₹1
• Estimated Share Price at End of Holding Period: ₹15
• Income Tax Rate: 20%
• National Insurance Savings: ₹50

Step-by-Step Calculation:

1. Partnership Shares:

Partnership Shares = 1000/10 ​= 100 shares

2. Matching Shares:

Matching Shares=100×1=100 shares

3. Total Initial Shares:

Total Initial Shares=100 (Partnership Shares)+100 (Matching Shares)+50 (Free Shares)=250 shares

4. Dividend Shares:

Dividend Shares=1×250/10 ​= 25 shares

5. Total Shares After Reinvestment:

Total Shares=250+25=275 shares

6. Total Value After Holding Period:

Total Value=275×15=4125 USD

7. Tax Savings:

Tax Savings=(100×10×0.20)+50=200+50=250 USD

8. Total SIP Benefit:

Total SIP Benefit=4125+250=4375 USD

The employee’s total benefit from participating in the SIP would be ₹4,375, considering both the value of the shares after the holding period and the tax savings.

Try Also: Share Average Calculator

How SIPs Work

When employees participate in a SIP, they have the opportunity to acquire shares in their company in one or more of the following ways:

• Buying Partnership Shares: Employees decide how much of their pre-tax salary to invest in shares. The company may match these investments with Matching Shares.
• Receiving Free Shares: Companies may award shares to employees for free. These shares are typically distributed evenly across all eligible employees.
• Reinvesting Dividends: Any dividends earned from shares held in the SIP can be used to purchase additional shares, potentially increasing the employee’s overall shareholding.

Benefits of a Share Incentive Plan

1. Tax Advantages: SIPs are attractive due to their tax benefits. Employees can buy shares with pre-tax income, reducing their overall tax burden. Additionally, if the shares are held in the SIP for a specified period, typically five years, they become free of income tax and National Insurance contributions.
2. Long-Term Investment: SIPs encourage long-term investment in the company, aligning employees’ interests with the success of the company. The longer the shares are held in the SIP, the greater the potential tax advantages.
3. Employee Engagement: By owning shares, employees may feel more connected to the company and motivated to contribute to its success, as they directly benefit from its growth.
4. Potential for Capital Growth: Employees benefit from any increase in the company’s share price. If the company performs well, the value of the shares can increase significantly, providing a substantial financial return.

Frequently Asked Questions:

Conclusion:

The share incentive plan calculator (SIP Calculator) is developed for employees and employers to calculate how many shares have been acquired by an employee, and how many shares will be given by companies or employers. This share incentive scheme calculator worked on the basic mathematics formula presented with a complete explanation.

If you encounter any type of issue using this share incentive plan calculator please give me a feed in the comment, Thanks!