July 29, 2021
Employee Stock Options
Payroll is typically one of the largest overheads for most companies. Staff retention and loyalty can help reduce the costs of retraining new staff and help improve on the company’s overall performance.
There are a number of ways how companies can attract, retain and reward their employees while improving productivity. This can range from work perks to greater flexibility. Employee Stock Options are being adopted by some companies as this helps to align the interests of employees with those of the business, ensuring long-term sustainable performance.
Maltese law does not regulate the condition under which share incentive schemes may be built, therefore companies are at the advantage of creating and structuring their own schemes making use of company and civil law notions.
There are different types of share schemes, some of which are;
With this scheme, companies grant their employees the option to purchase a certain number of shares in the company at a future specified date and at a pre-determined value, which may be either;
- Less than market value; or
- At market value.
The shares granted to the employees under this scheme would need to either be allotted or they would need to be transferred from an existing shareholder. Share options are taxable in Malta when they are exercised i.e. once the legal title over such share is transferred to the employees thus acquiring a ‘fringe benefit’ from the company, and not when the option is granted. Tax is charged at a rate of 15% on the difference between the market value of the share and the price paid, if any, by the employee as explained in ‘Figure 1’ below.
Market Value of Shares
Fringe Benefit Value
15% Tax Rate
To safe guard the company and its business, there is usually what is called a “lock in” or “vesting” period, this can be beneficial to both the company in the case of “Bad Leavers and the employee in the case of “Good Leavers”. The employee’s share option usually cannot be exercised immediately after grant but is typically exercisable only after a certain time-frame or lock in period has elapsed. This provides an incentive for the employee to remain with the company for a certain period of time in order to benefit from the incentive programme.
If an employee is terminated due to certain scenarios such as retirement, a serious illness, or any other event that the company deems appropriate to qualify the individual as a “Good Leaver’, the employee may still exercise their share option if terminated at any time prior to the vesting period. Any other Leaver who did not qualify as a “Good Leaver” would typically be considered “Bad Leaver” and so, any share option held by a “Bad Leaver” is generally irrevocably terminated, and the employee should have no claim against the company.
Phantom share plan
This is an effective way to reward employees without giving actual shares in the company. It is considered a cash bonus plan, equivalent to a dividend payment to shareholders but the individual doesn’t actually hold “real” shares or “equity” in the company. The person is entitled to receive compensation based on the allocated number of phantom shares awarded and the value of the company. Any payments that employees receive as a result of holding phantom shares will not be deemed to be a dividend payment, but a bonus which is taxable in the hands of the employees together with the rest of their salary, and is a tax deductible cost in the hands of the company. With careful planning, this type of scheme can reward employees in line with the growth of the company.
Phantom shares are taxable to employees as ordinary income and are deductible to the company.
Share awards allow for the company to issue shares to its employees, typically for no consideration, and is usually tied to a particular result or event. These are taxed in the same way as Share Options.
Offering employees a stake in the company in the form of a share-based compensation plan can increase commitment and motivation, which can lead to higher profits. It is important to note that such incentive plans must be tailored to the company so that they are consistent with the company’s culture and long-term goals.
To understand how Seed can help in structuring the ideal incentive programme for your company, do get in touch.
Should you wish to obtain further advice on this topic please get in touch with: