Many companies use employee incentive share schemes to attract and add value to employees’ remuneration packages. The end result of such schemes is that employees become shareholders in the employer company. It is important to obtain tax advice prior to any scheme being implemented and legal advice on the documents required for the preferred tax structure.
There are many options available to employers now to attract and retain employees. The preferred scheme adopted by a company should be based on tax advice suitable for the entity in question.
Schemes available include the Key Employee Engagement Programme (KEEP) which allows SMEs to compete with larger multinational companies in the retention of specified key employees. Some positive changes were introduced in Budget 2019 to the KEEP Scheme including an increase to the ceiling on the maximum annual market value of the shares that may be awarded can now equal the amount of the employee’s salary whereas previously it was capped at 50%. The three-year limit has been replaced by a lifetime limit and the amount of share options that can be granted under the scheme has increased from €250,000 to €300,000.
Share clog schemes are another option. In this type of scheme, shares issued to employees are subject to a ‘clog’ or restriction in relation to their sale. Employees are restricted from disposing of the shares for a specified period. A new class of shares may be created with specified rights attached to them.
Whatever scheme is implemented, from a company perspective what should be considered?
Generally speaking an employee will have little interest in participating in the management or control of a company. It should be made clear that the share scheme is not intended to confer any such rights on employees. In most cases a company will use a nominee company to hold the shares in trust for the specified employees. This streamlines the capitalisation structure of the company and allows it to maintain control after the options are exercised or shares are issued.
Founder shareholders may wish to maintain the right to sell the Company when and if they so decide without requiring the consent of employee shareholders. This can be achieved in the company’s scheme documents or its constitution. A drag-along clause with a power of attorney available in the event of non-compliance by an employee member will ensure that a sale is not held up. A nominee company, as mentioned above, will also simplify the sale process. Practically speaking, having one nominee company sign a share purchase agreement and ancillary documents is a lot easier than having to liaise with a group of employees during a sale transaction.
The company should consider whether any conditions attach to shares being issued or the vesting of options. Sometimes employees must meet certain targets or remain in the company for a specified period. A company can vary the conditions that attach to each specified employee by including vesting conditions in the scheme document.
Companies may not want employees who leave their employment in a company (whether in good or bad circumstances) to retain ownership of shares or an option over shares. Often a company will oblige a leaving employee to sell his shares or provide that an option over his shares lapses when he leaves.
There are many matters to consider when deciding to create an incentive scheme for employees. Such schemes can be of great use in attracting and retaining key employees. They give employees ‘buy in’ in terms of the growth of the company which can in turn incentive employees to work for the all-round success of a business.
However, it is essential both from a company and employee perspective that the schemes are established in a tax efficient manner with the correct legal documents prepared to reflect the preferred structure.
About the author, Gríana O’Kelly, Partner, Corporate and Commercial Team