Stock Related Compensation
The battle for workers’ rights is one that literally predates written history. Whether it has to do with working conditions, time off, or cut of the profits, the fight to give employees the recognition they deserve is one that never ends. Over the last few decades, the balance of power has shifted considerably towards employees, as the ability to freely share and access information has given them more knowledge of how much the big corporations really make, and how well they treat their employees.
With this newfound power, employees have been able to negotiate better conditions for themselves, which means employers are trying to figure out the best way to share the rewards. There are many ways to do this, such as commission or performance-related bonuses, but in this post, we’re going to focus on stock-related compensation.
What is Stock Related Compensation?
Also known as stock based compensation, share based compensation, and equity compensation, stock related compensation is a way for companies to pay their employees by awarding them shares of the business. At its core, the driving force behind this form of compensation is the belief that by giving employees partial ownership of the business, they will be more personally invested in ensuring its future success. In Ireland, this is known as Approved Profit Sharing Schemes, and it is one of three main ways that employees can acquire shares in the business they work for.
Under the Approved Profit Sharing Schemes, an employer may give up to €12,700 worth of shares in the business per year to an employee. These are generally tax free, provided certain conditions are met, although the employee will have to pay USC and PRSI on the value of any shares received. Under the Approved Profit Sharing Schemes, the employer is required to hold the shares on behalf of the employee for what is known as the “retention period”. Legally, the employee may not sell the shares they have been given for at least 3 years. Should an employee sell their shares before this three year period has passed, they will be obliged to pay income tax on the value of the shares either upon receipt or when they were sold, whichever is lower. After three years have passed, no such tax will be applied.
Alternative Stock Options
As mentioned above, there are two other major schemes aimed at helping employees acquire shares in their companies. The first is the relatively straightforward Savings-related Share Options Scheme, which is aimed at helping employees save money to invest in shares in their employer’s company in a tex-efficient manner.
Under the Savings-related Share options Scheme, an employee and their employer will sign up to an approved and legally binding scheme known as Save As You Earn (SAYE). From the outset, they will agree on an amount between €12 & €500, which will be automatically deducted from their pay each month and put in a savings account. The employee and employer must agree to a period of either three, five, or seven years, and the employer can offer a discount of up to 25% of the market value of the shares. To reiterate, all of this is agreed at the beginning of the scheme.
After the agreed period has transpired, you will be given the choice to buy the shares as agreed, or simply take the money. If you take the money, you will be exempt from income tax on the amount, but must pay both USC and PRSI.
The third route is the Key Employee Engagement Programme, or KEEP for short. Under this scheme, small-to-medium sized businesses may remunerate key employees with shares in the business. These value of these shares will not be subject to income tax, USC, or PRSI. Instead, capital gains tax is applied when the employee decides to sell. KEEP is currently in place until the end of 2023.
Why Use Stock Related Compensation?
With so many ways to remunerate employees who perform well, you may be wondering what the benefits of stock related compensation are. From an employee perspective, the tax incentives offered under stock schemes usually make it more appealing financially in the long run. While some employees might prefer to have cash instantly in their pocket, even if it means paying tax, those planning for their futures will be much more interested in maximising their returns.
According to a 2018 survey carried out by Lincoln Recruitment, two of the top five reasons employees are considering leaving their current role are finance related: improved monetary benefits (43%) and better recognition & rewards (24%). As only 13% of employees plan to stay in the current role for more than 3 years (coincidentally the minimum retention period for the Approved Profit Sharing Scheme), and it costs Irish employers roughly €13,100 to replace an employee, stock related compensation can be a very effective way to address the concerns of employees, while also reducing staff turnover costs.
Ultimately, the main purpose of stock related compensation schemes is to ensure that employees have a vested interest in a company’s success. Not only do these schemes offer employees the recognition and rewards they seek, they link the employees’ success directly to the company’s success. This keeps employees engaged and gives them a real reason to do the best job they can, rather than simply performing their contractual obligations. And in the end, the results are usually better for everyone involved.