Your Complete Guide To Irish Employee Share Plans

Thinking of introducing an employee share plan as a way to reward your employees? Read our complete guide.

Your complete guide to Irishemployee shareplans

TABLE OF CONTENTS

1. Approved Profit-Sharing Schemes (APSS)

2. Savings-related share option schemes (SAYE)

3. Key Employment Engagement Programme (KEEP)

4. Clog schemes

5. Unapproved share option schemes

6. Share awards

7. Phantom shares

8. Questions to ask before proceeding

9. Which share scheme will work best for you?

SETTING THE SCENE

Attracting and retaining key staff is one of the biggest issues facing companies in Ireland. Many different perks and incentives are offered with this mission in mind: pensions, workplace gyms, flexitime, private healthcare plans, and various wellness-related programmes. One area in which Ireland has tended to lag behind our European neighbours - and in particular the US - is that of share-based incentives. Some progress has been made in recent years, but we still have a long way to go before we fully embrace the many benefits that employee share award and share option schemes can bring, both for the individual and the company as a whole. Government legislation and associated new Revenue rules have facilitated a modest expansion of this area in recent years, and while the business community continues to lobby for further progress, there is also an onus on individual companies to educate themselves on what the existing share incentives landscape can do for them and their employees. Evidence shows that employee share schemes correlate with increased engagement, improved performance, more commitment, and greater staff

retention - all of which will add either directly or indirectly to a company’s bottom line. Do you know how encouraging employee share ownership can impact positively on your business in the short, medium, and long-term? At Global Shares, we have been managing employee share plans for some of the world’s biggest companies for more than 15 years, and so we know a thing or two about this subject. We’ve put together this guide as an introduction to the area, offering a brief overview to some of the most common share ownership schemes available to Irish-based businesses at this time. We’ll also pose some questions that you should be asking before proceeding, and identifying what type of plan tends to fit best with your business and the industry in which you’re operating.

SCHEME 1

APPROVED PROFIT-SHARING

HOW DOES IT WORK? To fully understand the attraction of an APSS, we need to first look at how the process of awarding a cash bonus plays out and why such a seemingly positive transaction can leave both employer and employee feeling somewhat underwhelmed.

Let’s take a hypothetical scenario and follow it through:

A company rewards a key employee for their efforts with a cash bonus. The company is recognising excellence and the employee is delighted because they feel their good work is being acknowledged – so far, it’s a win-win. However, the next step in the process is the calculation and deduction of the relevant taxation. For a cash bonus, that means income tax (40%), as well as Pay-Related Social Insurance (PRSI) and the Universal Social Charge (USC). By the time the payment reaches the employee, they will be netting less than half of the gross amount they were awarded. It’s still a bonus payment, but compared to what the employee was initially expecting, the final figure may come as a relative disappointment. Meanwhile, the company may feel similar frustration – seeing more than half of the award go somewhere other than originally intended. In addition, the company will be required to pay Employer PRSI on the full amount of the award. Based on the level of the award, this can see an added cost of the award of c. 11%.

APPROVED PROFIT-SHARING SCHEMES

An Approved Profit-Sharing Scheme (APSS) is a Revenue-approved employee ownership scheme that allows employees to convert cash bonuses into shares, with a view towards selling those shares for a profit after an agreed time period. With an APSS, there’s a reduced tax burden associated with the entire sequence of transactions for employer and employee alike.

SO, HOW DIFFERENTLY MIGHT THIS SEQUENCE OF EVENTS UNFOLD UNDER AN APSS?

At the outset, you’d need to liaise with Revenue to ensure that the scheme you intend to implement is fully compliant from the legal and tax perspective. Once that is formally approved, you can then proceed. As with a cash bonus, with an APSS, the intention to reward a high- performing employee with a bonus, but instead of making that a cash payment we convert it into shares. The shares are appropriated, at which time the employee will be liable for USC and PRSI, but, crucially, not income tax. The scheme allows for those shares to then be held in a trustee account for three years. After this time, if the employee then chooses to sell, whatever gain has been accrued above and beyond the value of the shares at the date of appropriation will be subject to Capital Gains Tax (CGT). The USC and PRSI deduction will be the same as with the cash bonus, but the CGT payment will be far less than would have been

claimed as income tax. In this scenario, the employee receives the original bonus largely intact and CGT is only applied to whatever gain is achieved in selling the shares. The beauty of an APSS is that employees behave as if they’re owners – they’ve got skin in the game, so to speak, and as the company grows, they share in that success.

WHAT ARE THE ADVANTAGES FOR THE COMPANY?

WHAT ARE THE KEY RULES?

A company can distribute shares up to a total value of €12,700 to each employee on an annual basis. Rules differ for each APSS approved but typically employees are eligible after six months of service. All participants in the scheme must be offered similar terms. The shares allocated must be non-redeemable ordinary shares. Shares can be sold before the official three-year period elapses, but negative tax implications will arise.

Schemes such as this can be lucrative for employees and as such are regarded as an effective way to recruit and retain key personnel. Employers make no PRSI contribution when remuneration is through equity rather than cash or other benefits. Companies can claim tax relief on the outlay involved in trustees acquiring shares and for the cost of establishing the scheme. Companies have control over the process, in that they can decide every year if they want to make awards. The interests of management and employees become more aligned, with all actively incentivised to ensure that the company performs as well as possible.

Prior approval from Revenue is required.

WHAT TYPE OF COMPANY DOES THIS SCHEME BEST SUIT? There are more than 500 of these schemes operating in Ireland today. The bulk of those are in public companies and subsidiaries of multinational companies with Irish operations. There can be practical difficulties for private companies around valuation and providing a market for the shares, but these obstacles can be overcome. It has also been observed that an APSS can be an excellent fit for ambitious and growing organisations.

2 SAVINGS-RELATED

SHARE OPTION SCHEMES (SAYE)

SAVINGS-RELATED SHARE OPTION SCHEMES (SAYE) A Savings-Related Share Option Scheme – also known as a Save As You Earn (SAYE) scheme – is a Revenue-approved employee ownership scheme that allows employees to exercise options in company shares on potentially favourable terms and without having to borrow money. Under this initiative, an employee agrees to set aside an amount from their net pay for a specified period. At the end of that period, the employee can choose whether to exercise options to the value of the accumulated savings or have that money returned to them.

HOW DOES IT WORK? Participants in this kind of scheme are entering into a savings contract, so that document will contain the key information and details relevant to the agreement. Among the questions that need to be answered at the outset are: How long will the plan last? What contributions are being made by participants? What financial institution will hold the savings? On the length of the plan, companies will generally opt for an SAYE lasting three or five years. Five years might be more attractive to the company in terms of encouraging staff retention, but it is also necessary to consider the employee perspective. With this in mind, depending upon the circumstances, a three-year term might be an easier sell when encouraging participation – especially if dealing with a younger workforce. On the size of the contribution, again, individual companies will have their own ideas, preferences, and needs, but the relevant legislation around SAYEs sets out that individual monthly contributions can range from €12 to €500.

IN A SAYE, AN INDIVIDUAL’S CONTRIBUTION CAN RANGE BETWEEN €12 - €500 EACH MONTH.

“THE OPTION PRICE IS SET AT THE OUTSET AND CAN INCLUDE A DISCOUNT OF UP TO 25%, THUS MAKING THE DEAL MORE ATTRACTIVE.”

On the financial institution point, you need to secure the services of a savings carrier to hold participants’ savings for the duration of the plan. Most Irish banks and building societies are authorised to provide this service. With the necessarily preliminaries established, the plan then unfolds as follows: The employee agrees to have a fixed amount of their net salary from each pay cheque moved to a qualified savings account for the duration of the plan. In tandem with this, the company assigns options to the participant, based on the amount the participant has committed to save. The option price is set at the outset and can include a discount of up to 25%, thus making the deal more attractive, in that this would offset any potential loss in the event of the share price falling over time and adds to the profit if the share price increases. At the end of the agreed period – whether three or five years – the participant can use the accumulated savings to exercise some or all of the options available to them or they can choose to have their savings returned as a lump sum.

It is possible for participants to withdraw their savings from the account at any time, but they lose the option to purchase shares when they do so. If an employee leaves the company during the life of the plan, depending upon the circumstances of their departure and the specific provisions set out in the scheme rules, they may be able to purchase a reduced number of shares. On taxation, the initial contributions are taken from net pay, so no additional deductions are made in the event of savings being withdrawn. As noted, the bonus received from the savings carrier at the end of the plan will be tax-free, so no charges apply on that either. If the participant chooses to exercise the options at the end of the contract, they will be liable for USC and PRSI, but only on the difference between the option price and the market value of the shares at that moment, assuming the latter is higher. If a participant then goes on to sell the shares for a profit, they may be liable for CGT, if the gain takes them above the exempt level for that tax year.

To win in the marketplace, you must first win in the workplace. - Douglas Conant, former CEO of the Campbell Soup Company

WHAT ARE THE KEY RULES?

It must be offered to all employees who meet the inclusion criteria. Eligibility can be pegged to time served with the company, with employers allowed to specify up to three years continuous service as the cut-off point.

Employees must be offered three or five-year contracts.

Savers make monthly contributions from net pay of between €12 and €500, but must commit to a figure at the outset. Employees can choose to take back their savings at any time during the life of the contract, but forfeit the right to options if they do so. The shares allocated must be non-redeemable, ordinary shares.

Prior approval from Revenue is required.

WHAT ARE THE ADVANTAGES FOR THE COMPANY? Schemes such as this can be lucrative for employees and as such are regarded as an effective way to recruit and retain key personnel.

Employers are not liable for PRSI.

Companies can claim a tax deduction on the cost of running the scheme.

WHAT TYPE OF COMPANY DOES THIS SCHEME BEST SUIT? Approved schemes such as SAYE are generally regarded as being suitable for relatively large, well-established businesses.

KEY EMPLOYEE ENGAGEMENT PROGRAMME 3

KEY EMPLOYEE ENGAGEMENT PROGRAMME Introduced at the beginning of 2018, the Key Employment Engagement Programme (KEEP) is a share options initiative designed to help SMEs tackle ongoing issues around skill shortages and staff retention. The logic of the scheme is that being able to offer targeted employee share ownership with tax incentives will enable SMEs to compete with larger companies in terms of attracting and then retaining key talent. This is the first scheme of its type introduced in the Republic of Ireland and, unsurprisingly, has experienced some “teething issues”, with the business sector making the case for changes almost from the moment it was introduced. The Finance Act 2018 sought to address concerns around limits linked to salary and the market value of grant options over shares, while Budget 2020 saw action taken around loosening eligibility rules – part-time employees can now avail and employee movement within an SME structured as a group of companies is also allowed for – but other concerns remain. It is hoped that the scheme will be further refined over time.

HOW DOES IT WORK?

The KEEP scheme applies to share options granted from 1 January, 2018 to 31 December, 2023. The terms of the programme allow employers to award a bonus incentive to employees that is exempt from income tax, PRSI and USC. The only tax liability is Capital Gains Tax, which will be applied after options are exercised and then sold. The option to acquire is granted at the market value at that time. Ideally, the share price will have increased by the time options are exercised. In the first instance, the company and participants will be party to a written agreement that explicitly sets outs the key details – how many share options are to be provided and at what price. Options cannot be exercised within 12 months of being granted, but also cannot be held for more than 10 years. This 10-year window means that the terms of the scheme may continue to apply to active options up to the end of 2033. While qualifying companies are required to make annual returns to Revenue detailing options granted, exercised, assigned or released no prior approval is required to operate a KEEP.

WHAT ARE THE KEY RULES?

To be eligible, a company must be private and meet the definition of an SME – less than 250 employees, turnover under €50 million and balance sheet total of less than €43 million. A company must either be resident in the Republic of Ireland or based in an EEA Member State and carrying out business here through a branch or agency. Originally, only full-time employees could participate, but as noted, that rule has been extended to include part-timers. Originally, options were not allowed to exceed 50% of an individual’s salary, but this limit was subsequently increased to 100%.

WHAT ARE THE ADVANTAGES FOR THE COMPANY? Schemes such as this can be lucrative for employees and as such are regarded as an effective way to recruit and retain key personnel. The interests of management and employees become more aligned, with all actively incentivised to ensure that the company performs as well as possible.

WHAT TYPE OF COMPANY DOES THIS SCHEME BEST SUIT?

This scheme is specifically designed for SMEs.

There is no upfront cash outlay for the employer.

Employers make no PRSI contribution.

CLOG SCHEMES 4

CLOG SCHEMES Restricted shares are free shares given by a company to selected employees which must be retained by recipients for a set period before they can be disposed. The time during which the shares must be retained – at least one year – is referred to as the “clog” period. The shares are offered as a bonus and the scheme offers a more tax-efficient alternative – for both employer and employee – to a cash payment.

HOW DOES IT WORK? Under a Restricted Share Scheme (RSS), the first step is for the company to set up a trust to hold the shares during the restriction/clog period. Then, the company will formally approach the employees they want to take part in the scheme, and offer specific details on the number of shares being offered and length of the proposed clog. If the terms on offer are agreeable to the employee, they will formally accept in writing or if a company uses a platform like Global Shares, the employee just has to accept the offer via their online account. The key consideration then is that the shares will be held in the trust for the agreed period, and during that time participants will not be able to transfer or sell them. The only exceptions to this rule will arise in the case of the death of a participant or possibly in a takeover scenario. In the event of a participant leaving the company during the clog period, how they are treated will depend on whether the circumstances of their departure lead to them being regarded as a “good leaver” or a “bad leaver”. Individual businesses will develop their own internal approach on this point.

This constitutes recognition on the part of Revenue that even though the participants hold the shares, the restrictions in place on transfer and sale effectively reduce their value for those individuals. The extent of the tax reduction will be directly linked to the number of years participants must hold the shares before being able to sell them. Basically, there is a 10% abatement for every year of restriction, up to a maximum of 60%. So, if your plan includes a one-year restriction, you will receive a 10% tax bill reduction; for a five-year restriction, the figure will be 50%; but for plans with even longer clog periods the maximum tax reduction is 60%, whether the clog for six, seven, eight years or even longer. When shares are finally disposed, that transaction may be subject to CGT, depending upon the specifics of the plan.

WHAT ARE THE KEY RULES? This is not an all-employee scheme. So, companies can choose which employees they want to include in any such plan. Companies can offer restricted shares to all employees if they wish, but usually an RSS will be targeted at senior executives and key employees. Initial income tax, USC and PRSI liabilities are reduced because of the restrictions imposed in the terms of the plan. The extent of the abatement will be linked to how many years the restrictions will be in place. Prior Revenue approval is not required, but the company must complete a return of information (Form RSS1) annually by March 31 following the end of the relevant tax year in which the restricted shares were awarded, and details must also be included in their Corporation Tax returns (CT1).

WHAT ARE THE ADVANTAGES FOR THE COMPANY?

The company is safeguarding its shares, in that sale is prohibited before the set period elapses.

Companies can claim a tax deduction on the cost of setting up and running the scheme.

Employers make no PRSI contribution.

An RSS may be useful when looking to build a stable senior team. As noted previously, this scheme allows employers to target specific employees. By giving key individuals a formal stake in the company, you make them more likely to stay with you into the long-term.

WHAT TYPE OF COMPANY DOES THIS SCHEME BEST SUIT? RSS schemes are frequently compared to KEEP schemes. One of the key distinctions made between the two is that companies who want to offer employees the prospect of a bonus based on share performance will opt for KEEP, while companies looking to make a small number of key personnel long-term shareholders will be more inclined to go with RSS.

UNAPPROVED SHARE OPTION SCHEMES 5

UNAPPROVED SHARE OPTION SCHEMES ‘Unapproved’ share option schemes are referred to as such because they generally do not require revenue approval. The approved schemes referred to earlier in this publication – APSS and SAYE – will work well in the business settings they were designed for, but we should not approach share option schemes with the idea that there can be a one-size-fits-all solution, as that is not necessarily the case. One of the key features of approved schemes is that they must be offered to all eligible employees and on the same terms, but this can be problematic for SMEs and startups whose needs may be better met by a more flexible approach, one that allows them to target key individuals, with a view towards retaining and/or attracting key talent. Unapproved schemes help to provide the flexibility that some companies need. Just as there is more than one type of approved scheme, the same is true for unapproved schemes. From a taxation perspective, the various schemes under the unapproved ‘umbrella’ tend to be categorised into two groups – short options and long options, with the former referring to schemes in which options must be exercised within seven years, and the latter referring to schemes in which no such restriction applies. The taxation benefits tend to be more generous with approved schemes, but unapproved schemes – with their greater flexibility – still make more sense for many companies.

WHEN THE PERFORMANCE OF 196 PUBLICLY TRADED ESOP AND NON-ESOP COMPANIES WERE COMPARED, THE ESOP COMPANIES OUTPERFORMED THEIR PEERS SIGNIFICANTLY IN SOME AREAS:

HOW DOES IT WORK? When establishing a scheme of this type, there is no requirement for the company to formally notify Revenue. At the outset, the board merely decides that it wants to introduce a share options scheme, passes a resolution to that effect, and then sets down the rules that will inform the scheme during its existence. The company will then identify which employees they want to be participants in the scheme, and presents them with an Option Agreement, which will include key information around the duration of the scheme, the number of shares involved and the option price. At this point, participants are effectively given the right to purchase a specified number of shares for a pre-determined price in the future after an agreed time period has passed (vesting period). Taxation arrangements may vary, depending upon whether the agreement is for short or long options. Whereas no income tax is levied on short options at the point that they are received, for long options – when the scheme will last for more than seven years

– Revenue reserves the right to levy a charge, based on the difference between the option price and the market price, assuming the market price is higher when the options are granted. For that reason, most companies will look to offer short options. With short options, there is no tax on the grant, but participants will be liable for tax at the point that the options are exercised. At that point, income tax, PRSI and USC will all be applied on the difference between the option price and the market price at the time of exercise, assuming a gain has been made, and must be paid within 30 days. Participants will then be liable for CGT on whatever profit they make when they sell their shares.

WHAT ARE THE KEY RULES?

This is not an all-employee scheme. So, companies can choose which employees they want to include in any such plan.

Less generous than approved schemes on tax, with employees liable for income tax, PRSI, USC, and CGT at various points along the line. Prior Revenue approval is not required, but the company must complete a return of information (Form RSS1) annually by March 31 following the end of the relevant tax year in which the restricted shares were awarded, and details must also be included in their Corporation Tax returns (CT1). Under self-assessment provisions, the employee must give details on the exercise of options, the gain on the option, and any subsequent disposal in their annual tax return. WHAT ARE THE ADVANTAGES FOR THE COMPANY? The employer can choose which employees will be offered options. This means a company can focus on key executives who, once granted an ownership stake, will have an explicit stake staying with the company and actively contributing to its long-term success.

Employers make no PRSI contribution.

WHAT TYPE OF COMPANY DOES THIS SCHEME BEST SUIT? All companies can look to implement an unapproved scheme, but, as mentioned previously, private companies need to address issues around share valuation and having a market for those shares before proceeding. Unapproved schemes are the most popular plan choice for startup companies in Ireland as they want flexibility. As well as this, unapproved schemes are more cost efficient to establish and so for a startup, this can be a big factor.

SHARE AWARDS 6

SHARE AWARDS Whereas with a share option scheme, employees are offered options to buy shares at a set price at a predetermined point in the future, with shares awards the company gives employees free or discounted shares, usually based upon hitting key performance targets and/or at a predetermined point in the future. Share awards are regarded as a ‘safer’ choice than share options, in that the ceiling for growth tends to be lower, but there is also far less risk attached. Holding options may yield a windfall down the line, but alternatively those shares may end up close to worthless, at which point an option to buy will not be attractive. With share awards, those concerns do not exist.

HOW DOES IT WORK? Free shares can be granted either as a once-off or as part of a formal plan. Whichever approach is followed, these shares are regarded as a benefit-in-kind by Revenue, with the value of that benefit being the market value of the shares at the point that they come into the possession of the employee – whether the shares are handed over immediately or after a vesting period. Discounted shares can also be offered to employees at the discretion of the employer. The discount – as you might imagine – is the difference between the amount an individual pays for the shares and their market value at the time of the transaction. Income tax, USC and PRSI comes into play in both scenarios. In the case of free shares, the tax liability is assessed based on the market value of the shares at the time you receive them, whereas for discounted shares you are taxed on the value of the discount. Share awards can be facilitated through different plans, so no single procedure or set of rules will apply. When companies opt for a Restricted Stock

Unit (RSU) plan, they are consciously moving away from options and to awards. With an RSU, employees are not asked to exercise anything, instead they simply receive shares after meeting whatever performance-related criteria was agreed upon or when an agreed period of time has elapsed. When an employee enters into this arrangement, they will generally receive a certificate of entitlement and will consent to the vesting period. If a company uses a platform such as Global Shares, we do this part online, so the certificate of entitlement does not apply. We also do grant acceptance online, thus removing manual processes and paperwork. There is no tax liability at the grant date, but income tax, PRSI and USC charges all become due at the moment of vesting, with the income tax calculated based on the market value of the shares at that time. Then, if the shares are sold on, the employee will be liable for CGT (Capital Gains Tax).

WHAT ARE THE ADVANTAGES FOR THE COMPANY?

Share awards are a useful incentive for attracting and then retaining top talent.

For RSUs:

Companies can save money up front, as they are offering deferred compensation.

Administration costs are relatively small, as shares are not being tracked and recorded prior to vesting.

Shares will only be issued at the point of vesting, which helps to delay dilution.

WHAT TYPE OF COMPANY DOES THIS SCHEME BEST SUIT?

Just as share option schemes are most closely associated with startups and up-and-comers, share awards tend to be more common among large and established businesses. Options are popular when a company’s limited financial resources are tied up in getting off the ground, whereas established companies will be in a position to, for example, offer more attractive salaries when recruiting and therefore don’t need to fall back on offering options in the same way as newer competitors. On a similar point, a new company has no track record, so its shares may or may not be attractive in the future, whereas an established company is more of a known quantity and as such its shares will have a value in the here and now.

SHARES 7

PHANTOM

PHANTOM SHARES A phantom share option scheme is a non-equity-based employee incentive plan. Put plainly, it is a cash bonus scheme, but rather than being arbitrary or random, it tracks a company’s share value. In practice, employees receive options for notional or hypothetical shares – known as phantom units – with a view towards securing cash payments at a later time based on positive movement in the value of the company’s shares above and beyond a base price set at the start of the process. The base price will usually be the market value of the shares at the point that the options are granted. While share value is typically the key consideration with a phantom scheme, companies, where feasible, can choose to use a different metric to assess business performance over time, such as earnings per share or overall profit. Whatever the method, the principle remains the same – company progress over time is tracked and that will be directly linked to whatever pay-out participants ultimately receive.

No new shares are issued, therefore there is no dilution. Participants only ever receive cash pay-outs.

HOW DOES IT WORK?

the option, they will receive a cash bonus equivalent to the difference between the market value on that date and the value at the time the option was granted. From the tax perspective, a phantom shares plan is categorised as an unapproved share scheme and broadly treated in the same way as other such schemes. “The employee will have to pay income tax, PRSI, and USC upon receipt of the bonus” while the company may be liable for employer’s PRSI because they are making a cash payment. A key difference, though, is that since no shares are involved, there will be no CGT. A practical consideration for companies to bear in mind when considering a phantom plan is that they will be entering into an open-ended financial commitment, and this could, in theory, prove problematic down the line. The point here is that a company will not necessarily be able to control its share price value and so it is possible that by the time the crystallisation date arrives (the end of the plan), the price may have increased to a point whereby fulfilling the bonus pledges might create a financial strain. That scenario might seem unlikely, but companies need to be aware of all possibilities before entering into an agreement of this nature.

A phantom plan can come in two main types – ‘Appreciation only’ and ‘Full value’. ‘Appreciation only’ plans do not include the actual value of the shares themselves, with any pay-out based exclusively on the increase in the value of the shares during the lifetime of the plan. However, ‘Full value’ plans will factor in both the value of the shares and the increase in value over time. When a company decides to implement a phantom plan, it needs to establish at the outset which employees it wants to take part. In theory, all employees can be included, but companies have flexibility on this point, and so in practice this kind of scheme will be targeted at key personnel. As no real shares are being optioned or changing hands, the scheme itself will be more straightforward to administer. So, once the relevant employees have been targeted, the key considerations will be to set the base price, the amount of notional options being assigned, and the length of the plan. On the latter consideration, the company needs to strike a balance between their own interests and those of their employees. A five-year term might seem attractive to the company, in that it would assist in efforts to retain key personnel over time, but such a long-lasting plan might prove to be a hard sell with the target audience in the first instance. A three-year plan might prove to be more tempting for employees. In practice, participants will be granted an option over a set number of shares at a specified option price with that price most commonly being the market value at the date the option is granted. When an employee ultimately exercises

WHAT ARE THE KEY RULES?

It is not an all-employee scheme.

The shares involved are purely notional.

Plans can be either ‘Appreciation only’ or ‘Full value’.

WHAT ARE THE ADVANTAGES FOR THE COMPANY? This kind of scheme allows a company to receive the benefits of employee share ownership without actually offering shares or options. Phantom schemes tend to be flexible, and thus can be tailored to the needs of individual companies.

They are relatively easy to set up and administer.

Companies can choose which employees to target, so in practice this means that only key personnel tend to be included.

WHAT TYPE OF COMPANY DOES THIS SCHEME BEST SUIT? A phantom scheme would be best suited to companies who want to tap into the benefits associated with granting share options and share awards, but whom either want to avoid diluting their existing shareholdings or who are unable to do so for regulatory reasons.

QUESTIONS TO ASK BEFORE PROCEEDING 8

QUESTIONS TO ASK BEFORE PROCEEDING Even if you’ve been convinced as to the merits of employee share ownership schemes in principle, you still need to proceed carefully. Jumping straight in and grabbing onto the first scheme you find would be an ill-advised strategy. That’s not to say that you might not get lucky and find yourself going with a scheme that perfectly meets your needs, but that’s exactly what it would be – luck. Instead, you should look to give yourself the best chance of success, and that means not only consulting with specialists in the field, but also, even before that, taking the time to ask key questions of yourself and your team, to establish the needs of your business, and letting that inform the process of identifying the share scheme that will tick the key boxes for you and your employees.

Here are some of the issues you need to consider before committing to a specific share scheme:

WHAT TYPE OF BUSINESS DO YOU HAVE? This might seem obvious, but it is no less important for that. Are you a public or a private company? Are you an SME or a larger company? Are you part of a group? Are you a startup or are you firmly established? Whatever the answer, the type of business you have is going to be a key consideration in deciding what share scheme is right for you, as some schemes will, for example, be a better fit for a startup than the Irish branch of a large multinational. WHAT DO YOU WANT TO ACHIEVE? Another obvious question, perhaps, but also one for which you need to have a clear and well-thought out answer. What is your overall objective? Are you first and foremost concerned with attracting new talent? Is your overarching concern about retaining key personnel? Are you looking to incentivise greater productivity? Do you want your employees to identify more closely with the business and its goals? Again, you need to be consciously aware of what your top priorities are and let that inform your share scheme selection process.

DO YOU WANT ALL OR SELECTED EMPLOYEES TO BE INCLUDED? This is another important question, as the answer will most likely strongly influence your final decision. If you specifically want all employees to potentially be eligible (barring, for example, limitations on minimum time served with the company), then you will be drawn to one of the Revenue-approved schemes, as the rules of these plans specifically dictate that they must be applied evenly across the company, that is, that all employees – whether a senior executive or someone at entry level – be treated the same. Companies that want to target specific employees – usually senior and key people – will make a point of avoiding approved schemes, as they cannot meet their needs. It is important to note that an unapproved scheme can be applied on an all-employee basis, but in practice will tend to be used when a company has decided that it wants to go with a more targeted plan. DO YOU WANT TO ISSUE ACTUAL SHARES OR NOT? This might seem like an odd question, given that we are talking about share schemes, but while most schemes do involve ‘real’ options and share awards, it is also possible to go with a phantom scheme, which mirrors the form and structure of a shares scheme, but ultimately leads to a cash bonus payment rather than the allocation or sale of company shares. So, if you want to experience the benefits of an employee share scheme, but do not want to issue shares (for whatever reason), then clearly that prerequisite will steer you away from actual share-based schemes and towards the phantom-style plans that meet that key criterion.

ARE YOU AWARE OF THE PRACTICAL CONSIDERATIONS?

What happens when an employee leaves the company, for whatever reason, during the lifetime of the scheme? Do they forfeit options? If they have already been awarded shares, will there be a provision compelling them to sell? There is more than one way to handle this type of situation, but you need to have a clear policy in place from the outset. If the company grows over time and more employees receive shares, the value of the shares can become diluted, which can have the unintended consequence of leaving staff of longer standing feeling penalised, which, in turn, can generate active resentment. Again, the key point here is for you to be aware of this scenario at the outset and look to plan accordingly, rather than finding yourself looking to deal with the situation only as it occurs. Again, as stated earlier, there is no end to the number of questions you can ask yourself before proceeding. That doesn’t mean you should think yourself to a standstill and never make an actual decision. No, the point is to make clear that you do need to think about it and be clear on what is in your best interests before proceeding. Essentially, do your own research, talk to the specialists, and then make your choice and reap the benefits of employee share ownership.

There is no end to the questions we could highlight in this section. The more you think about share schemes in the context of your company, the more questions will come to mind. Some of the questions will relate to the idea of the plan and what you hope to achieve, like those asked above, but there is another category of question to be asked – those revolving around the more practical ‘nuts and bolts’ considerations. For example, you need to think about cost. Introducing a share scheme can be a complex undertaking and the costs associated with it don’t stop when you get it up and running. Ongoing maintenance over what will be a period of several years will also demand a substantial outlay. Some schemes will prove more costly to administer than others. That’s not to say cost should be the decisive factor when deciding what scheme to go with; more correctly, the point here is that you need to be aware of the cost implications when making that choice. If the awarding of shares is linked to individual performance, then you need to make sure that the criteria upon which that performance is measured are as objective as possible, otherwise you run the risk of creating resentment when the purpose is to incentivise and reward.

WORK BEST FOR YOU? 9

WHICH SHARE SCHEME WILL

A study by Rutgers University found that ESOPs (employees share ownership plans) increase sales, employment and sales per employee by: +2.4% +2.3% +2.3% Annual sales growth Annual employment growth Annual growth in sales per employee

WHICH SHARE SCHEME WILL WORK BEST FOR YOU? As alluded to in the previous section, choosing an employee share ownership scheme isn’t necessarily going to be a straightforward process. An ideal fit for one company or sector might not work quite as well for another company or sector. So, with that in mind, here are some general rules of thumbs around how the various options available in this country tend to suit different sectors and priorities.

If you want to introduce a scheme designed for all employees, then you will most likely opt for a Revenue-approved scheme – an Approved Profit Sharing Scheme (APSS) or a Save As You Earn (SAYE) scheme. The Revenue-approved schemes must be offered to all employees who meet the inclusion criteria, with time served being a typical point on which to peg eligibility. The all-employees clause means that APSS and SAYE schemes are most commonly associated with public companies, large businesses, and Irish subsidiaries of multinational companies. If you want to be able to pick and choose which employees to invite into a share scheme, then you will opt for a non- approved share scheme, as these provide the flexibility you desire. A Restricted Share Scheme (RSS) allows a company to target key senior personnel for a share incentive plan with a view towards retaining those individuals into the medium and long-term. The Key Employee Engagement Programme (KEEP) was specifically introduced by the Government in 2018 with a view towards helping SMEs to recruit and retain key personnel. The scheme seeks to assist SMEs in competing with larger companies for talent by allowing share options to be offered under relatively generous tax terms. If you want to secure the benefits of an employee share scheme, but don’t want to issue any shares, then you will opt for a phantom scheme. These schemes mirror the structure of an actual share scheme and track the value of company shares over time, but at the end of the plan participants receive a cash bonus instead of shares. Any company can look to implement an unapproved scheme, but in practice it tends to be a little more complicated for private companies, as they will sometimes need to overcome issues around share valuation and the market for those shares. Generally, share option schemes are most closely associated with startups and companies still establishing themselves, as early in a company’s life money will be tight and so offering options is an effective alternative to unrealistic overly generous salaries. The flipside of that point is that share awards are more common among large and established businesses.

CONCLUSION Whichever plan type you and your advisors decide is best for your company, it’s clear that employee ownership brings many benefits to not just to employees, but for the business itself. Employee ownership is an effective, proven way to reduce the wealth gap and it fuels growth for companies – it’s a win win. When employees are part of a share scheme, they’re more invested in the company, more aligned with the company’s goals and will work harder to reap the returns. They’re not just working for a pay cheque; they’re looking for ways to drive the company forward. And given that most share plans spread out the issuance of shares over a period of time, employees have an incentive to remain with the company for longer. Mix those two incentives together – a reason to stay longer, and a reason to work harder – and you can see why they give companies such a great advantage. According to Harvard Business Review, about 17 million people in the U.S. workforce (12% of the total) are employed at variations of employee-owned businesses. Irish companies, and indeed European companies, have long lagged behind their American counterparts in terms of offering employee ownership. But Ireland is catching up and if you’re considering employee ownership as an option to reward your employees in a tax efficient way, contact us. We’ve been leading the way in the employee share plan space for more than 15 years and manage share plans for some of the world’s biggest companies.

Employee Ownership, Simplified. It’s what we do.

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www. globalshares .com

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