What is the formal process for granting awards under an incentive plan?
Corporations whose shares are publically-traded on a US stock exchange must grant equity awards to executives through a formal compensation committee. The members of the committee must consist of two or more outside (non-executive) members of the board of directors who qualify as “non-employee directors” under Section 16 of the ‘34 Act. As such, compensatory transactions between the company and its Section 16 officers will qualify for an exception from “short-swing” profits recovery.
Generally, a non-employee director is a director who (i) is not currently an officer or employee of the issuer or a parent or subsidiary, (ii) does not receive compensation, directly or indirectly, from the issuer in excess of USD120,000 from a group member for services rendered as a consultant or in any other capacity other than as a director, and (iii) does not possess an interest in any other transaction for which “related person” disclosure would be required under the US proxy statement rules.
The grant of an award must also follow any requirements set forth under the laws of the state in which the corporation is organized and, if applicable, the corporation’s articles of association, by-laws, the terms of the compensation committee’s charter and the plan documents.
Awards made to employees other than Section 16 officers may, if permitted by state corporation law, be made by the chief executive officer, president, and/or other duly authorized persons under authority granted to such persons by the compensation committee. The grant of authority usually must place limits on the size of the pool of awards, the size of any one award and the vesting conditions.
Awards of private companies are usually made by the company’s board of directors.
In the US, equity awards are evidenced by contractual grant agreements without the formality of deeds. Awards may not exceed any per person, annual or other limitation set forth in the plan rules.
Given that the granting of awards in an incentive plans are not mandatory, there are no formal process to follow. Now, the Federal Labour Law establishes that once a benefit is granted, it becomes part of the benefit package of the employee, unless established otherwise. Given that the employers have the burden of proof, we recommend that the plan is perfectly drafted and any amounts paid to the employee are justified and documented by a receipt.
Since, as a rule, incentive plans are not expressly required / provided by law, the formal process for granting awards is usually unilaterally established by the employer. This, of course, depends on the type of incentive plan and specific conditions established for granting. However, considering that, as a general rule, in practice, the majority of incentive plans are performance-driven, the process typically starts with reviewing the individual performance results of the employee and/or the business performance results of the employer. Based on the outcome of this review, the award is calculated based on the formula established by the company and afterwards communicated to the employee.
Provided that the incentive plan is share based, it should be implemented based on an framework detailing the conditions and the applicable mechanism for granting the award, as well as certain documentation supporting the accession of the employees to the scheme.
The formal process for awarding grants depends on the employment agreement. Furthermore, the process is based on the employer’s intentions of awarding an employee with grants.
If the parties want the 7P Scheme to apply on an Incentive Plan, the parties must enter an agreement, which includes a specific reference to the 7P Scheme. This agreement should be entered prior to or at the same time as the awarding of the grant.
The formal process for granting incentives is agreed directly between the company and the employee. The law does not impose a mandatory or formal process.
- The board of directors and board of shareholders or otherwise authorized institutions shall make the rules of the incentive scheme, the management (mainly the founders) decides on the recipient, quantity, HR department or directors office should assist in the implementation of the scheme. For most companies, the lawyers will assist in the drafting of the relevant legal documents of the equity incentive plan.
- The company and the recipients enter into the option award agreement and relevant documents.
- The company's board of directors or designated awarding institution assists the execution of the option award when the recipient’s option is vested.
- The recipients of the option pay the exercise consideration and obtains the corresponding option. In practice, for unlisted companies, some will choose to register the equity incentive matters with the competent AIC upon vesting or exercising, while some will choose to entrust the founder or some management official to hold the incentive equity shares and register such shares with the competent AIC when the company is merged, under stock system restructuring or in process of application for IPO.
In case of an equity incentive plan, the shareholders meeting needs to adopt a resolution (i) approving the incentive plan and the number of shares that will be issued in connection with this plan, and (ii) generally authorising the board of directors or a committee to administer the plan and elect the employees that may participate in the plan.
In case of a cash-based plan (such as a Share Appreciation Right) in general it’s the company’s board of directors that can grant the awards without shareholder approval.
The grant of an award must also follow any requirement set forth the corporation’s articles of association, remuneration policies and if applicable corporate governance code.
Usually, a share-based plan is approved at the general shareholders meeting (except for phantom stock plans that are approved by the board of directors) and the awards are granted by the board of directors, and the participants are required to sign an individual agreement setting forth the terms and conditions for the relevant grant.
There is not a particular formal process for granting awards under an incentive plan. It is common to define the process for granting awards in the company’s internal policy or rules of employment which is normally a part of the employees’ annual evaluation.
The board of directors of public limited liability companies are obliged to prepare a statement in respect of the remuneration of executive personnel. Remuneration includes payment in kind, bonuses, allocation of shares, subscription rights, option or other forms of remunerations linked to shares or the development of the share price of the company or of other companies within the same group of companies, as well as pension schemes, severance pay arrangements and any form og variable element in the remuneration, or special remuneration in addition to the basic salary. The statement shall be approved by the shareholder on the annual general meeting. An advisory vote shall be held on the board of directors’ guidelines for setting the remuneration of executive personnel.
If the incentive plan includes share options (either in the form of a proxy for the Board of Directors to issue shares or in the form of granting warrants) for the employees, a formal process shall be completed. The board of directors shall draw up a proposal, which shall be approved by the general meeting. The resolution shall be notified to the Norwegian Business Register.
The formal process for granting awards depends on the nature of the incentive plan. Some plans (such as SAYE, SIP and share offers) involve the issue of invitations where participants are asked whether they want to participate and to what extent. In the case of discretionary share option plans, it is usual for options to be granted unilaterally by the board (or remuneration committee) of the issuer company. In both cases, participants are usually issued with certificates that evidence their awards and which are subject to the terms of a set of plan rules. An exception to this is EMI options which are granted by way of an agreement between the issuer company and the participant although these are usually subject to a more detailed set of rules. A further communication will be made when the award "matures" in which case participants will be given the documentation necessary to exercise their options/deal with their shares as appropriate.
Formal requirements regarding the process of granting awards exist depending on the incentive plan itself and whether they are equity or non-equity-based.
- Within equity-based plans the formal process requires, generally, a formal decision and the entry of the new shareholder structure into the commercial registry.
The strict requirements and formal process for capital increase for a stock corporation are laid down in Section 192 ff. of the German Stock Corporation Act. The main steps are: Creation of the conditional capital by resolution of the Annual General Meeting to increase the capital, registration and entry of this resolution in the commercial register and publication of the entry, submission of a subscription declaration by the beneficiaries before payment of the full consideration for the subscription shares to the corporation. As a result the share capital of the company increases immediately by the nominal value of the new shares issued. The capital increase has to be entered in the commercial register. The shares must be issued to the employees within one year of their acquisition. The conditional increase of capital for providing shares to the employees may result in a dilution of of the value of the shares. Convertible bonds may only be issued on the basis of a resolution passed by a three-quarters majority of the Annual General Meeting (Section 221 para. 1 sent. 2 German Stock Corporation Act). If the convertible bonds are not granted by a conditional, but a regular capital increase, the capital increase shall require a formal subscription in addition to the above mentioned subscription declaration.
The employee participation in a limited liability company may simply be achieved by transferring shares to the employee, but must be notarized each time. If an increase in the share capital is resolved in the limited liability company, a notarised or certified declaration by the transferee is also required for taking over each share in the increased capital (Section 53 ff Limited Liability Companies Act) as well as the entry of the capital increase into the commercial registry.
- Non-equity based incentive plans are not subject to formal process requirements. Requirements are limited to precise contractual regulation. Only pension schemes are furthermore regulated under German law.
- Generally, within the process of granting an incentive plan co-determination and information rights of an existing works council must be respected (Section 87 para. 1 No. 10 Works Constitution Act). A company and works council (if established) may agree upon the granting of an incentive plan through an agreement between the parties. If shares are granted by a parent company, the works council´s rights may be excluded due to the fact that the incentive plan has not been subject to the company´s decision. The mere participation in the implementation of a share option program without influencing the structure of the remuneration performance by the parent company cannot trigger a right of co-determination. At least it is required to have a limited room for manoeuvre, which is granted by the parent company through the granting of rights of co-determination and rights of proposal.
a. For employees, the main steps are the followings:
- Draw up the incentive plan (recommendation to draft or translate the plan into French, to avoid any dispute on it enforceability, even though the French Supreme Court ruled that the plan is enforceable against an employee who was fluent in English and had received communication of the plan that he signed);
- Consultation of the Works council’s if required (which is the case in particular when the plan concerns a large number of employees or when it may have consequences on a large proportion of the company's share capital);
- Communicate the plan to the employee at the beginning of the reference period. The way the plan is notified to the beneficiary is key to determine whether the plan is a contractual item or not. Where the plan is deemed to be a contractual item, it cannot be altered or removed unless with prior express consent of the beneficiary.
b. Special requirements apply for company officers, in particular in listed public limited companies. The plan must first be approved by the Compensation Committee and the Board of Directors and then by the general meeting of shareholders (Say on pay ex ante). Vote of the general meeting of the shareholders is also required at the end of the vesting period (Say on pay ex post). In other words, in listed public limited companies, the principles and criteria for determining and allocating shares to company officers must be approved annually by the general meeting of shareholders.
The terms and conditions of the plan must be met by the employee before the start date of the accrual period. The company must ensure that the employee knows, understands and agrees with the terms of the plan. A copy duly signed by them is highly advisable to try to reduce the risk of claims and to reinforce the position of the company in case that the employee alleges lack of knowledge.
In addition, employee representatives are entitled to issue a non-binding report prior to the company implementing decisions on incentive schemes. The employee representatives must issue the report within 15 days. After this time, the employer has fulfilled the legal requirement regardless of whether the employee representatives finally issue a report.
In general terms, there is no statutory additional obligations for the implementation of an incentive plan such as to consult either employee representatives or trade unions although collective bargaining agreements can provide that the agreement of the employees' representatives is required if the company implements, modifies or withdraws these plans.
As rewards under incentive plans are considered salary for all purposes, a withdrawal or change may be considered a substantial change to working conditions. If the change affects a certain number of employees in the company, informing and previously consulting the employees' representatives is compulsory.
There is no legal or formal process under Colombian law in order to grant awards under an incentive plan.
There is no general procedure applicable to all incentive plans.
When the beneficiaries of the plan are the company’s directors, the Companies Code rules regarding their remuneration must be followed (supra n. 12). The competent body to decide on remunerations (including the type of benefits emerging from the plan) varies according to the beneficiaries. If those are members of the board the competent body is the shareholders’ meeting or a remuneration committee appointed by the shareholders. For other beneficiaries the plan should be approved by the board of directors.
For stock option plans granted by non-listed companies the company needs to make available the shares to be delivered to the beneficiaries upon exercise of the respective options. Since, unless expressly agreed otherwise by the shareholders, shareholders cannot be forced to sell the beneficiaries the shares needed to satisfy the exercise of the respective options, the two main alternatives under Portuguese Company Law are basically the acquisition of treasury stock (and subsequent sale thereof to the beneficiaries exercising the options) or the carrying out of one or more capital increases destined to the beneficiaries to whom the company has previously granted options to subscribe shares. The setting up of these operations requires the fulfilment of several requirements, set forth in the Companies Code.
For plans whose beneficiaries are the employees the most common procedure includes the following steps:
- Drawing up of the plan, which is not mandatory to be in Portuguese, provided that the beneficiaries know the used language;
- There is no obligation to inform the employee’s representatives (work council or union representatives at company level - union delegates) in advance about the plan. However, the law grants works councils several rights, being one of them the right to information upon its request. Therefore, if there is a work council at the company (which is not mandatory) it may request the company information regarding the plan. In this case, the employer must provide the requested information, in writing, within the period of eight days (or fifteen days when justified by the complexity of the information);
- The company shall inform in writing each of the beneficiaries of the Plan’s conditions;
- The subsequent procedures depend on the type of plan and benefits.
The Board of Directors normally identifies among its members a Commission in charge of approving and amending the measures. The Pay and Compensation Committee identifies fixed and variable compensation and the benefits to which individual managers and employees are entitled. The members of this Committee shall be mostly non-executive and independent directors. The Committee cannot include individuals who have any relationship of kinship or affinity with directors, shareholders or employees, hold or have held other positions that place them in conflict with the company, or provide the company or its affiliates with (independent) products and/or services. The Pay and Compensation Committee shall establish:
- the total amount of stock options to be distributed;
- the method of issue: date on which they can be purchased, method of calculating the purchase price, expiration date;
- method of liquidation of stock options: increase in share capital or sale of the company's own shares;
- the beneficiaries of stock options;
- the individual objectives, which each manager must achieve;
- date and method of establishing individual objectives;
- the amount of stock options available to individual beneficiaries.
According to current best practices, the price of stock options is determined from the weighted average price of the shares in the month preceding the issue date, the maturity date is within one year from the issue date, the assessment of individual targets is subsequent to the approval and certification of the financial statements for the year, the financial statements contain an indication of the shares and stock options purchased, sold and held by individual managers.
There is no specific formal process; companies follow their own structures. In practice, premiums are usually agreed under individual employment agreements. However, if the employer regularly pays premiums to its employees (i.e. three years in a row) although such payment is not agreed under the employment agreement, these payments become a mandatory contractual entitlement as standard workplace practice.
In principle, premium/bonus payments are peculiar to each employee and employer can set specific criteria for employees’ entitlement to incentive compensation. However, the equal treatment principle should be taken into account in implementation of the determined criteria among the employees and in payment of incentive compensation.
If equity based incentive plans are chosen by publicly held companies, publicly held companies have to obtain the approval of the CMB when the employees purchase the company stocks. Employee stock purchase is also required to be notified to the Public Disclosure Platform by the publicly held company.