In today’s competitive globalised jobs market, with record high levels of employment and workers enjoying unprecedented levels of mobility, employers are looking for every advantage to attract and retain the top talent.
Pensions, private healthcare, wellness classes, free on-site breakfasts, workplace gyms and yoga sessions are just some of the current perks being used to attract the best candidates.
And whilst employers are becoming increasingly progressive and indeed creative, one benefit that is relatively underdeveloped but growing in Ireland is that of share incentives. Share incentive schemes effectively allow an employee to take a share of ownership in the company they work for,
helping the employer to retain talent and
plan for the future.
What is a share scheme?
An employee share scheme, in its simplest form, is a mechanism by which employers can
empower and incentivise staff to improve their performance in a way which contributes to the growth and profitability of their business. In return, employees acquire a vested
interest in the business, in the form of shares. Share schemes allow staff to participate financially, and in most instances tax efficiently, in the growth of their employer’s share price.
According to a US economic research centre, employees with equity in the company they work for are 40% less likely to move, reducing staff turnover, recruitment costs and the loss of key employees. Employees who have a financial stake in the business they work for are more engaged and motivated to succeed. This leads to increased profitability, growth, and competitiveness, as well as better employee retention.
Share schemes in Ireland
While the benefits of such incentivisation are clear, the reality is that Ireland lags behind our neighbouring counterparts in terms of adoption. Today, only 6% of Irish employees are shareholders in the companies they work for, compared to an EU average of 22%.
The Irish ProShare Association (IPSA) has been instrumental in promoting the benefits of employee share schemes in Ireland, and despite the current low levels of ownership, the move towards share incentivisation is growing. To address the rising demand, Intertrust recently launched a ‘Performance and Reward Management’ service to work with Irish employers seeking to establish a share incentive scheme for their staff. Intertrust’s share plan services include trusteeship, establishment of employee benefit trusts & other structures, plan administration and bespoke online portal services.
Irish tax legislation allows for many types of schemes which facilitate employers in allocating shares, or granting options to buy shares, to employees tax efficiently. Depending on the type of scheme, employees may have to hold the shares for a number of years before they receive the tax break.
While there are several types of schemes, broadly speaking they can be broken down into two categories – approved and unapproved plans.
Approved Profit Sharing Schemes
Companies can operate broad based schemes such as Approved Profit Sharing schemes (APSS). Records held by Revenue.ie indicate that there are over 500 of this type being operated in Ireland. The APSS arrangement, which must be established under a trust deed and formal set of rules, must be made available to all employees on similar terms. The shares in the trust must be held by the employee for three years to receive the full tax benefit.
Another available approved scheme is ‘Save as you Earn’ (SAYE), a savings-related, approved share option scheme. The company must engage the services of an approved savings carrier and the employee must save for a period of three, five or seven years.
Any shares allocated or options granted under these approved schemes are exempt from income tax however, the employee must pay Universal Social Charge (USC) and Pay Related Social Insurance (PRSI). Capital gains tax may be due on share dispose.
Unapproved Share Schemes
Unapproved share schemes are also another remuneration method for the employer. Although these don’t provide the same attractive tax advantages as approved schemes they are a useful tool for the employer as they can be offered on a selective basis.
Restricted stock units, unapproved share options and forfeitable shares are some examples of employer rewards that fall under unapproved schemes, which are typically aimed at senior executives and directors.
Share options are a popular form of executive compensation for many companies. A share option is the right to buy a certain number of shares at a fixed price, sometime in the future, within the company. Employees can generally exercise their options – i.e. buy the shares – after a specified period, known as the vesting period. The employer can make the granting and exercising of options dependent on reaching certain targets.
When an employee exercises their options, it’s at the price fixed at the date of grant, i.e. when the options were given to the employee, regardless of the current market price. They can then keep the shares or, if the market price is higher, sell them at a gain.
The employee must pay income tax, USC and PRSI on shares or options granted under unapproved schemes.
In January 2018, a new share option scheme was introduced; the Key Employee Engagement Programme (“KEEP”). It is a share based remuneration incentive for unquoted SME companies. The KEEP scheme was a welcome step in assisting employers to offer more tax efficient incentives to its key staff however, since its introduction there has been little uptake of the scheme due to the restrictive nature of qualifying conditions.
The tax breaks afforded under share schemes doesn’t just apply to the employee. There is a tax saving of employer PRSI (10.95%) for the company, where remuneration is by way of equity participation. Employers looking to introduce a scheme should initially seek tax and legal advice on the design of a suitable equity pay arrangement for their employees and directors.
The business case and benefits of employee share schemes are tangible. Fundamentally, regardless of business size or career stage, both employers and employees should seek to gain an understanding of the schemes available. Such schemes and the potential they offer can have a very real positive impact on a person, both professionally and personally.
Insights | Private Capital & Hedge Fund Services
How to mend the valuation disconnect between GPs and LPs
31 August 2023
Insights | Corporate Client Services
OECD Pillar 2: Multinationals consider next steps under new minimum tax measures in Switzerland
31 August 2023