Are there any limits on who can participate in an incentive plan and the extent to which they can participate?
Generally, US plans may be extended to employees, consultants, independent contractors and directors (executive and non-executive directors). ISOs and ESPPs, however, may only be offered to employees.
ESPPs must adhere to certain non-discrimination rules. ESPPs must allow all employees of a participating employer to subscribe for shares except that there may be excluded (i) employees who have been employed less than 2 years, (ii) employees whose customary employment is 20 hours or less per week, (iii) employees whose customary employment is not for more than 5 months in any calendar year, and (iv) highly-compensated employees (those earning USD125,000 or more in 2019).
Any employee, regardless of its job title, salary range or seniority can participate in incentive plan. Under Mexican labour law, there is no limitation on the type of employee that can participate in this type of plans, and thus; the employer or the related company sponsoring the plan can establish conditions or certain attributes on participants to become eligible, provided these are not discriminatory. Mexican labour law embodies the principle of equal access to employment benefits, but with the possibility of establishing differences based on “importance of services” and “efficiency conditions”. There are incentive plans allowing participation of individuals acting as contractors, agents or employees of vendors. This becomes problematic under Mexican labour law because incentive plans are interpreted to be part of an employee’s employment conditions and therefore, a Mexican labour or social security authority may characterized such participants as employees of the legal entity responsible for the plan.
For incentive plans not expressly regulated by law, there are no limits related to participants, mainly depending on the business interest of the employer. For example, some employers offer share option plans only to management level employees whose activity can actually directly lead to the business' success, others (usually in the Technology sector and especially in start-ups) offer them to all employees to secure a strong interest in the success of the business they thus arguably feel more intrinsically linked to.
Under Danish employment legislation, all employees can participate in an Incentive Plan.
Under Danish taxation legislation, a special tax scheme (“7P Scheme”) was introduced in 2016 under the Danish Tax Assessment Act (in Danish: ligningsloven). If the 7P Scheme is applied to an Incentive Plan, the employee is taxed on the value of the Incentive Plan as share income (up to 42%) instead of as salary (up to 55 %). Furthermore, 7P Scheme entails that the taxation is postponed until the sale of the Shares.
In general, the 7P Scheme may be applied to all Share-based compensation for employees and the board of executives.
Under the 7P Scheme a higher proportional value of the share-based compensation, i.e. 20% of annual salary as opposed to 10% of annual salary in other situations, can be granted, if it is the general Incentive Plan in the Company (a plan comprising at least 80% of the employees).
The 7P scheme only applies to employees, i.e. board members cannot apply the scheme.
There are certain mandatory limits in Financial Institutions on the offering of incentive plans.
There is no distinction or limits for applying or participating in incentives. According to Ecuadorian jurisdiction, however, cash payments made regularly to workers could be presumed to be a permanent employment benefit; for example, if an employee receives a bonus in the same amount for several successive months, then in the case of any dismissal dispute, the authorities would take the worker’s salary, plus payment of cash-based incentives made on a regular basis, into account when calculating severance pay.
Companies have the discretion to decide who can participate in an incentive plan and the extent to which they can participate under their articles of associations and director resolutions. Administrative Measures for the Equity Incentives of Listed Companies has certain requirements regarding the recipient of the incentive plans: Article 8 Equity incentives may be granted by a listed company to its directors, senior officers, key technical staff or key business staff, as well as other employees considered by the company to have a direct influence on its business performance and future development, with the exception of independent directors and supervisors. Foreign employees in the position of director, senior officer, or member of the key technical or the key business staff of the listed company may also be granted equity incentives. Shareholders holding, individually or in aggregate, 5% or more of the shares or actual controllers of a listed company and their spouses, parents or children may not be granted equity incentives. Additionally, the following persons may not become incentive recipients: 1. anyone who has been identified by a stock exchange as an inappropriate recipient during the most recent 12 months; 2. Anyone who has been identified by the CSRC or any of its agencies as an inappropriate recipient during the most recent 12 months; 3. anyone who have been subject to administrative penalties or been denied market access by the CSRC or any of its agencies due to a gross violation of laws and regulations during the most recent 12 months; 4. anyone not allowed to take the position of director or senior officer of listed companies under the Company Law; 5. anyone prohibited by laws and regulations to participate in the equity incentive plans of listed companies; or 6. any other persons as specified by the CSRC.
There are in principle no limits on the employees that can participate in the incentive plan. The incentive plan may however not make a distinction on who can participate that is in breach with the principle of equal treatment. Therefore, a direct or indirect distinction on race, part-time/full-time employment, definite/indefinite term contract, etc. is in principle prohibited. The principle rule is that (i) an employer cannot treat participants that are in an equal position unequal, unless there is an objective justification, and (ii) an employer can treat participants in an unequal position, unequal.
In order to benefit from certain financial regulatory exemptions, the scope of persons may need to be limited to – in short – employees and/or certain conditions need to be met.
With respect to share-based incentives, only the company’s statutory officers and directors, employees or individuals (or the legal entities owned by them) that provide services to the company can participate in such plans. Such limits are set forth under the Brazilian Corporation Law and also pursuant to the Accounting Pronouncements Committee (“CPC”) 10.
No limits on participants. Non-employees, such as non-employee directors and consultants, can participate. Companies have discretion over to whom an incentive plan is offered as long as each plan is offered on the same conditions to all participants. In practice, however, many companies have forfeiture conditions such as the termination of employment condition or retirement of the employee in their incentive plans. In that sense, in the standard incentive plans, having a connection with the company, such as employment and/or director, is the threshold requirement for participation of an individual in such plans.
Generally, there are no limits on who can participate in an incentive plan or the type of conditions the company can set forward as long as the plan can be objectively justified and is not in conflict with statutory law or collective agreement(s).
Norwegian legislation prohibiting discrimination must be complied with. The employers must also observe relevant regulations and restrictions regarding stocks and options where they apply.
An incentive plan is normally based on a mutual agreement or on a discretionary basis. They are not legally required by law.
It is not uncommon for senior executives or management teams to be offered participation in an incentive plan as encouragement.
Non-tax advantaged plans do not usually have a limit on the extent to which individuals can participate. Tax-advantaged plans however do have strict conditions and limits. These include:
Under a SIP a company can (in any tax year) only offer each participant a maximum of £3,600 of free shares, £1,800 of partnership shares (being shares bought with gross pay) and up to two matching shares for every partnership share purchased. (Note, however, that if the relevant SIP rules allow this, the participant may be able to buy more shares using the dividends received from free, partnership or matching shares).
An individual can participate in SAYE with deductions from net salary of between £5 and £500 per month.
Under the tax-favoured part of a CSOP there is a limit on the value of shares that an individual can hold under options. This is currently £30,000 and is measured by reference to the market value of shares at the time the relevant option is granted.
An individual can only hold EMI options over shares with a market value of £250,000. EMI plans can only be operated by companies with fewer than 250 employees and gross assets not exceeding £30 million.
Under German law, there are generally only few restrictions on who can participate in an incentive plan (see below regarding supervisory board). However, the framework of an incentive plan may be designed for employees only or management. However, for the status of the respective persons it is important to define the membership to one group. For instance, a freelancer can participate, but might then bear the consequences of being classified as an employee, which leads to a different legal handling of the contractual status in respect of taxes and social security contributions. The remuneration of the Supervisory Board members by options on shares of the company is inadmissible, regardless of whether the option program is backed by repurchased own shares or by conditional increase of capital. In contrast, members of management and the board of directors can be participants.
Employees can participate in equity plans to the extent of the regulations of the German Stock Corporation Act, whereas the total nominal value of shares in respect of options may not exceed 10 percent of the nominal share capital (Section 192 para. 3 and Section 71 para. 1 no. 2 German Stock Corporation Act).
Mostly, share plans include a restraint on disposal so that the employees are bound to the shares and are not allowed to trade or sell other than stated in the plan.
There are no regulations for virtual share option plans. For the protection of the employees, German law prohibits to compose the employee´s remuneration predominantly by shares, share options or bonds (Section 108 para. 2 Trade Code). The jurisdiction has not clarified yet to what extent the remuneration can be composed by shares. This does not apply to management board members.
For the extent of participation the company must comply with the principle of equal treatment. This allows a differentiation by groups of the beneficiaries. A differentiation based on gender, disability, ethics or part time work or other criteria of anti-discrimination is prohibited.
Generally speaking, as far as employees are concerned, there are no limits on who can participate. The grant is discretionary. However, note that under French law, the “equal work, equal pay“ principle applies and that discrimination is prohibited. Differences between employees are possible if justified by objective reasons. Accordingly, an incentive plan must in principle be offered to all employees who are in a similar situation in terms of responsibilities and position within the French entity.
Note that listed companies may only grant free shares or stock options to employees of their subsidiaries, as defined by the French Commercial Code.
In any event, to benefit from the favourable tax and social regime, no free shares or stock options may be granted to an employee or a corporate officer holding more than 10% of the share capital or if the effect of the grant is to increase his shareholding to more than 10% of the share capital.
Concerning corporate officers (who do not have an employment contract), the French Commercial Code provides for some limits in the event of free shares or stock options award. The incentive plan must comply with those limits in order to benefit from the favourable tax and social regime.
More particularly, a restrictive list of officers is provided for by this code:
- the chairman of the board of directors (“président du conseil d'administration”) ;
- the chief executive officer (“directeur general”) ;
- the deputy chief executive officer (“directeur général délégué”) ;
- the members of the management board (“membres du directoire”)
- the manager of a joint-stock company (“gérant d’une société par actions”).
Corporate officers of a subsidiary are eligible only if the granting company is listed.
In addition, for stock options and free shares granted to corporate officers as of December 2008, a listed company must meet at least one of the following conditions during the financial year in which the allocation takes place:
- either, granting stock options or shares to all of its employees and to at least 90% of the employees of its French subsidiaries in which it holds at least 50% of the share capital;
- or setting up an additional profit-sharing agreement for the benefit of its employees and at least 90% of all employees of its aforementioned subsidiaries.
Considerations from an employment point of view.
Who can participate in an incentive plan. Companies can grant incentive plans to all their employees regardless of whether they are senior executives. Nevertheless, individuals of third entities rendering services for the company (e.g. consultants) should not be remunerated by means of the incentive plan to the extent that this would be an indication of illegal assignment of employees.
The Spanish Constitution and Statute of Workers prohibits discrimination on the grounds of birth, race, gender, religion, opinion, or any other personal or social status, including: civil status, age, language, political ideas or being part of a trade union.
To avoid that the granting criteria could be considered as discriminatory, it is strongly advisable that companies use objective grounds when deciding to which employees they will grant shares such as:
- Asking for an initial contribution.
- The company's global performance.
- The employee´s professional group.
- The employee's individual performance.
- The maintenance of the shares for a period.
- The employee's length of service with the company.
Maximum value of the incentive plans. The only restriction is that the employees should receive in cash at least the salary stated by the applicable collective bargaining agreement as minimum. Incentive plans should be an additional remuneration to the minimum salary.
There is no restriction on the maximum value of the incentive plans. The company decides the maximum value and the rules to obtain it (targets to be met, etc.) and this is set out in the plan document.
Considerations from a mercantile point of view.
Directors may participate in incentive plans provided that the remuneration they receive under such plans complies with the provisions for the remuneration of directors in the Spanish Companies Act (Ley de Sociedades de Capital), which provides as follows:
1. The Articles of Association must establish the free or remunerated nature of the position of director. Such remuneration must be one of the following:
(a) a fixed allocation,
(b) attendance fees,
(d) variable remuneration with indicators or general benchmarks,
(e) remuneration in shares or linked to their development,
(f) severance grants, provided that the termination was not due to failure to perform the duties of director; and
(g) such savings or provident schemes as may be considered appropriate.
Where the remuneration system includes a share in profits, the statutes of the company shall determine in particular the share or the maximum percentage thereof. In the latter case, the General Shareholders´ Meeting (the "GSM") shall determine the applicable percentage within the maximum laid down in the Articles of Association.
In limited liability companies (Sociedades limitadas or "S.L.s"), the maximum percentage of participation may in no case exceed ten per cent of the profits distributable among the shareholders.
In public limited companies (Sociedades anónimas, or "S.A.s"), participation may only be deducted from liquid profits and after the legal and statutory reserves have been covered and shareholders have been paid a dividend of four per cent of the nominal value of the shares or the highest rate established by the articles of association.
In public limited companies, when the system of directors' remuneration includes the delivery of shares or stock options, or remuneration referenced to the value of the shares, it must be expressly provided for in the Articles of Association and its application shall require a resolution of the GSM.
The resolution of the GSM must include the maximum number of shares that may be allocated each year to this remuneration system, the exercise price or the system for calculating the exercise price of share options, the value of any shares taken as a reference and the duration of the plan.
2. The maximum amount of the annual remuneration of all the directors must be approved by the GSM and shall remain in force until its modification is approved. Unless the general meeting determines otherwise, the distribution of remuneration among the different directors shall be established by their agreement and, in the case of the board of directors, by a decision of the same, which shall take into consideration the functions and responsibilities attributed to each director.
The remuneration of the directors must in any case be in reasonable proportion to the importance of the company, its current economic situation and the market standards of comparable companies. The remuneration system established must be geared to promoting the long-term profitability and sustainability of the company and incorporate the necessary precautions to avoid excessive risk-taking and the reward of unfavourable results.
The GSM may establish a resolution with a broader content, a "remuneration policy".
In addition, the GSM may issue instructions to the administrative body. Or it may also require that any resolution regarding remuneration of the administrative body be approved by the GSM.
In addition, if the Bylaws provide for a maximum percentage of profits as a remuneration system. The GSM shall then establish this percentage within the range established in the Bylaws.
If the Bylaws provide - as a remuneration system - for the delivery of shares or stock options, or remuneration referenced to the value of the shares, then it will be necessary for the GSM to determine the number of shares, the price, the calculation system, the reference value and the duration of the plan.
3. The Board of Directors is responsible for distributing the remuneration among the different directors according to the functions and responsibilities of each Director.
The appointment of one or more Managing Directors requires an agreement in writing that includes all the agreed remunerations and even the indemnity for early termination. This contract must have the vote in favour of 2/3 of the members of the Board of Directors and the abstention of the Director concerned.
The relationship between the CEO and the company is twofold: by appointment by the General Meeting (which appoints him a Director) and by the Board of Directors (which delegates powers).
Specialties for Listed companies:
The directors' remuneration policy shall be adjusted as far as corresponds to the system of remuneration established in the Articles of Association and shall be approved by the general meeting of shareholders at least every three years as a separate item on the agenda.
The proposal for the remuneration policy of the board of directors shall state the reasons on which it is based and shall be accompanied by a specific report from the Appointments and Remuneration Committee. Both documents shall be made available to shareholders on the company's website from the date of the notice of the general meeting, who may also request that they be delivered or sent free of charge. The announcement of the call to the general meeting shall mention this right.
The directors' remuneration policy approved in this way shall remain in force for the three financial years following that in which it was approved by the general meeting. Any modification or replacement thereof during said period shall require the prior approval of the general meeting of shareholders in accordance with the procedure established for its approval.
In the event that the annual report on directors' remuneration is rejected in the consultative vote of the ordinary general meeting, the remuneration policy applicable for the following financial year must be submitted to the approval of the general meeting prior to its application, even if the aforementioned three-year period has not elapsed. Exceptions are made for cases in which the remuneration policy has been approved at the same ordinary general meeting.
Any remuneration received by directors for the exercise or termination of their office and for the performance of executive duties shall be in accordance with the remuneration policy in force for directors at any given time, except for the remuneration expressly approved by the shareholders at a general meeting.
As long as benefits are provided under a non-discriminatory basis, employers are free to establish the type of benefits that they will grant and who will be entitled to such benefits. Employers can establish limitations as per who participates on an incentive plan. For example, a company may establish that an specific benefit will only be granted to people who have rendered services to the company for a specific period of time.
Incentive plans for companies directors must comply with the Companies Code rules regarding the remuneration of executive directors, according to which the remuneration can partially consist of a percentage (the maximum amount of which needs to be set out in the articles of association) of the company’s profits, whereas remuneration of directors with supervisory functions (i.e. members of the audit committee) must mandatorily only consist of a fixed sum (this solution is often recommended for all non-executive directors).
There are no specific limits applicable to the beneficiaries if they are employees.
Nevertheless, when granting incentives, the company must observe the general principle of non-discrimination: Different treatment is allowed provided that it is based on a justifiable and determining requirement ,has a legitimate objective and the difference in treatment is proportionate. Therefore, the incentive plan must be offered to all employees who are in the same professional situation in terms of responsibilities and position within the company.
Stock option plans and other long term incentives schemes are often reserved for permanent employees, which, given the specific nature of these benefits (that may imply that the patrimonial advantage will only take effect latter), is, in our understating, justifiable and therefore legal.
When the feeding of a stock option plan requires the acquisition of treasury stock (what happens with non-listed companies) the principle of shareholders’ equal treatment must be observed.
The framework of an incentive plan may be designed for employees only or management. As regards the benefits admitted to tax relief, each scheme is to be applied to a well-identified category of employees.
In particular, with regard to performance bonuses, the subjective scope of application of the relief is defined by the specific characteristics that must characterize both the employer and the employees. As far as the employer is concerned, paragraph 186 of Law 208/2015 reserves the tax relief to the private sector and, consequently, excludes all public administrations from its scope. As for the workers, in the private sector mentioned above, the number of beneficiaries is identified with reference to the amount of employee income earned in the year preceding that in which the bonus was received. At present, this amount must not exceed EUR 80,000 per year. The application of the tax reduction, thus, depends on two joint requirements: one of a qualitative nature, consisting of the nature of the income produced (income from employment), the other of a quantitative nature, identified in the income limit (80,000 euros). The income limit of Euro 80,000 shall take into account the income from employment gained in the year prior to the year of application of the relief, even if resulting from multiple employment relationships, and also include pensions of all kinds and allowances under Article 49, paragraph 2, of the TUIR. Moreover, for the purposes of verifying the limit of 80,000, the income to be considered is only that subject to ordinary taxation, with the exclusion, therefore, of any income from work subject to separate taxation.
In conclusion, with regard to the identification of the income limit of 80,000 euro, only income from employment subject to ordinary taxation should be taken into account, including the portion of the performance bonus subject to substitute taxation in the previous year. However, the following amounts shall not be taken into account for the purposes of this limit:
- income subject to separate taxation;
- income other than income from employment (e.g. income from self-employment, similar income, etc.);
- performance bonuses converted at the employee's choice into non-taxable benefits pursuant to Article 51(2) and (3) of the TUIR.
Finally, as regards the so-called corporate welfare, in order for it not to be deemed as income, it must be offered to all employees or to certain categories of employees. In particular, the term "categories of employees" does not refer only to the categories listed in the Civil Code (e.g. managers, workers, etc.), but to employees of a certain type (e.g. all employees of a certain level), provided that these frameworks are sufficient to prevent the granting of payments ad personam. Benefits should therefore be offered to a homogeneous group of workers, regardless of whether, in practice, only some of them benefit from them. Consequently, the same payments made available only to certain workers also contribute, in accordance with the new regulatory provisions, to the formation of the income of employees.
There are no detailed provisions determining the parties’ participation in the incentive plans.
Stock options or performance-based payment schedules of the company cannot be used for the compensation of non-executive directors.
Pursuant to Article 4.6.3 of the Communiqué on Corporate Governance of CMB no. (II-17.1) it is prohibited to use profit sharing, stock option/purchase plans, performance based plans for the salary of independent board members. Since the salary plans of independent members shall be determined in a way to not to damage their independence.
There are also some specific rules which apply for employees working in specific sectors such as banking.