IN TODAY’S COMPETITIVE jobs market, 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 perks being used to attract the best candidates.
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 that contributes to the growth and profitability of the business.
In return, employees acquire a vested interest in the business, in the form of shares. Share schemes allow staff to participate financially in the growth of their employer’s share price.
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 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.
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 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, but the employee must pay USC and PRSI. Capital gains tax may be due on share dispose.
Unapproved share Schemes
Unapproved share schemes are 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 – ie 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 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 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 an individual, both professionally and personally.
Noreen Grogan is Intertrust‘s performance and reward manager.