What kinds of incentive plan are most commonly offered and to whom?
The types of plans and the recipients of awards will vary with the maturity of the company, its industry, and whether the company is a corporation or a tax pass-through such as a partnership or a limited liability company (“LLC”).
Established companies whose shares trade on a US stock exchange typically issue restricted stock units (“RSUs”) and performance share units (“PSUs”). High-growth public companies such as biotechs will often issue stock options.
Most US private companies are organized as LLCs which issue rights to future appreciation known as “profits interests.” Private companies organized as corporations will issue restricted stock and/or stock options as further described in Q/A-3 and Q/A-5.
While some start-ups and high-tech companies offer equity broadly to a substantial percentage of employees and many consultants, except for publicly-traded companies (which offer employee stock purchase plans) most mature companies, companies in other industries and LLCs confine awards to executives and key managers of the company.
Incentive plans in Mexico are not mandatory and in general, the employer or a related company can design and offer them without limitation. The most common incentive plans are offered to white-collar employees in the form of performance bonuses, sales commissions and equity plans. Although certain companies have established incentive plans in favour of blue-collar workers based on productivity, this is still not a wide-spread practice and has the potential risk of involving the union representing the workers in the plan’s design and operation. Careful drafting of the country’s participating plan and/or participants’ enrolment forms will reduce potential labour risks of a joint liability, if the offeror of the plan is not the Mexican employer of the employees that can participate in the incentive plan.
As a rule, there are no mandatory incentive plans expressly provided by law. The decision of offering incentive plans thus lies with the employer, depending on its business organisation needs and typically cascading their group's culture and approach into their Romanian affiliates.
Incentive plans are used for motivating employees and typically, in practice, there is a distinction between the plans for sales employees by comparison with other categories of employees. More specifically, considering the nature of their work and its direct impact, sales employees are generally incentivised with commission schemes or incentive plans closely linked to sales targets, while the most common type of incentive plan for other categories of employees is the performance bonus. This is also linked to (annual) performance targets / objectives, typically comprising an element of individual performance and an element of business performance of the organisation. Based on our experience, the majority of Romanian employers offer performance-related incentive plans, especially for white collar / office jobs, usually to all their employees.
Of course, incentive plans may be used not only to motivate employees to do their job and possibly an extra mile for reaching their targets, but also for employee retention and fidelity/ loyalty. In these cases, the incentive depends on the element of time, namely the seniority within the employer (for example, by granting seniority bonuses at certain work anniversaries, such as 5 years, 10 years, 15 years etc.). Flexible-benefits type of arrangements - essentially allowing employees to choose whatever serves them best from a pre-set pool of benefits committed by the employer - are increasingly gaining popularity for the same reason.
Share option plans are the incentive type that could secure both motivation and retention of the employees as the employee's benefit grows proportionately with the success of the business and the vesting depends on the individual still being employed with the company at relevant dates, therefore covering both elements.
In Denmark, cash bonus plans are common for (almost) all levels of employees, however, more common in relation to white collar employees than for blue collar employees.
For specialists, managers or executives cash bonus plans as well as share based incentive plans are common, with the latter being more common for larger companies.
For the different kinds of incentive plans offered, see question 2.
Ecuadorian legislation is protectionist when it comes to workers, offering them important benefits and guarantees. This has not been an impediment, however, for corporations to implement their own incentives plans, which are agreed upon with their employees. These voluntary incentives can be defined as follows:
- Cash-based: Different bonuses granted based on the criteria of meeting objectives, reaping results in the short or medium term, share option plans, and so on.
- Non-cash-based: Cars, subsidies, club memberships, training, extended days of maternity and breastfeeding leaves, short work schedules and so forth.
There are no restrictions on employees in terms of their access to incentive plans or on companies wishing to offer them. Voluntary incentive plans may be proposed to employees, managers, expatriates, legal representatives, etc.
The incentive plan could be offered in various kinds, while most commonly used incentive plan forms are share options and restricted shares. Ordinarily, the incentive plan are offered to the management, key employees of the company, some companies provide equity incentive plans for ordinary employees and exterior consultants, while year-end bonus and performance-based bonus are usually offered to all or most employees.
A distinction should be made between ‘all employee’ plans and management incentives plans.
‘All employee plans’ are generally free or discounted share plans, including Restricted Share Units (‘RSU’) plans, and share option plans.
Management incentive plans commonly put the participant at risk and are more often performance based. A distinction should be made between publicly and privately held companies. Free shares awarded to management of listed companies are subject to a minimum holding period (in accordance with Dutch corporate governance rules). Co-invest plans are common for management in companies that are privately held. Consequently, the structure of incentive plans widely differs between publicly and privately held companies. The same goes for the legal and tax aspects one has to consider when structuring these plans.
The most common incentive plans are the (i) short-term which are: annual profit or result sharing plans; annual variable incentive; retention bonus and spot awards; and (ii) long-term that are usually share-based plans which can be implemented through one of the following types of plans:
- Stock options plan;
- Matching shares;
- Stock grant;
- Performance shares; and
- Phantom stock.
These incentives are designed to be offered to employees, directors and executives of the companies, according to the eligibility criteria and conditions. Usually, for sales force employees, the variable incentive applies on monthly or quarterly basis.
The business environment in Japan has changed drastically since the bubble years. Changes such as the downsizing of companies, increase of the number of foreign competitors and creation of joint venture enterprises with foreign companies increased pressure on the management of labor costs. Such changes have also affected the style of employment in the country, affecting not only the classical life-time employment style, but also mid-career employment. Under this movement, a number of companies have started adopting a variety of incentive plans; some of them expecting from employees a recognizable performance development in the short term.
An incentive plan commonly adopted by Japanese companies is the payment of a bonus. The bonus scheme is usually calculated based on the performance of the employees. According to statistics recently published by the Japanese government, 90% of Japanese companies have a bonus plan in place and 95.7% of such companies have actually paid the bonus. Among such companies, more than 50% have taken into consideration the individual performance of the employee for granting the bonus. The employee’s performance is measured mainly based on his/her level of achievement of goals, which is normally assessed during the course of HR evaluation procedures. There are several criteria utilized by companies for assessing an employee's performance, such as points prorated by seniority, title, ability/skill and performance towards the objectives of work, which are typically established in the process of evaluation.
In addition to the payment of a bonus, Japanese companies listed on stock exchanges commonly offer share options to their employees. Roughly speaking, approximately 95% of Japanese listed companies have adopted a share purchase plan as an incentive plan for their employees. In the case of overseas corporations holding a subsidiary or an affiliate in Japan, different types of share plans in their jurisdictions are commonly offered to the employees in their jurisdictions.
Although it is not so common in Japan when compared to the performance bonus and share option plans explained above, a “profit sharing” scheme also is an option for Japanese companies. Under such an incentive plan it is possible to implement a bonus scheme by which the funds to be allocated for the payment of a bonus to employees are calculated based on the company’s profits by multiplying a certain percentage to the business profit. Generally, the payment will be made in a same way as a cash bonus, i.e., annually or semiannually in cash.
Some companies have implemented the Japanese ESOP (Employee Stock Ownership Plan) scheme, mainly by utilizing their existing share purchase partnerships by the employees. Although there was a movement to encourage companies to implement an ESOP around year 2000, the ESOP is not yet recognized as a major scheme for incentive plans.
Various forms of cash bonus plans are commonly offered to employees. Such plans are typically cash based, but could also be linked to share price development through a phantom stock plan.
- Collective bonus – profit sharing
- Team based bonus plans
- Individual performance based bonus plans
Share option plans
Various forms of share option plans or share subscription rights are also commonly offered to employees.
Share purchase plans
A typical broad employee plan is purchase of shares with a discount, often in combination with a mandatory holding period.
Periodic discounted share purchases in combination with a share saving scheme.
Some companies choose to award matching shares based on a factor of original share purchase instead of a discounted share purchase in combination with a minimum holding period.
Two main types of incentive plan are commonly offered to UK employees and directors: share option plans and share acquisition plans.
Under share option plans participants are awarded a right to acquire shares in the future at a price fixed now. Participants will have no interest in the shares until they exercise their options.
Under share acquisition plans participants acquire shares from the outset and have the same rights as other shareholders of that class.
Incentive plans have become an increasingly popular element of remuneration. In practice, there are various forms and possibilities. Start-ups often offer share programmes due to their very limited own capital, while listed companies often grant virtual options to key employees. Small and medium-sized entities motivate their employees mainly by bonus and target agreements or by granting participation in annual net profit.
It is common practice in France to reward employees through bonuses, in particular in companies belonging to international groups.
On an individual basis, the most commonly offered incentive plans are bonuses in cash and equity bonuses (free-shares and stock-options). Those plans are usually offered to high level employee (whose work directly influences the company's results) and certain corporate officers (see question 5).
Stock-options plans allow employees (usually managers) of a company to subscribe or purchase, for a fixed period, shares of their company (or, under specific conditions provided for by the French Commercial code, shares of other companies belonging to the same group), at a price fixed in advance, which cannot be modified during the term of the option (except in very specific cases such as a financial transaction likely to alter the value of the security).
Free-share plans allow to allocate free shares of the company to an employee (generally a manager), (or, under specific conditions provided for by the French Commercial code, shares of other companies belonging to the same group).
Note that on a collective basis, in companies with at least 50 employees it is mandatory to set up a profit-sharing agreement (“participation”). Also, it is very common to have company saving plans (“PEE”) or an optional profit-sharing plan (“intéressement”). These kind of schemes are not “tailor made”, because all employees, and sometimes even company officers, are beneficiaries. We will therefore not mention them in this questionnaire.
Kinds and structure of incentive plans to be offered depends mainly on the industry where the company operates and the role of the individuals to whom the incentive will be offered.
Bonus, commissions and incentives are the kind of incentive plans most commonly offered to employees in Spain. On the contrary, share option plans are not commonly offered by local Spanish companies but are frequently offered by Spanish subsidiaries of multinational companies.
Spanish employment regulations do not contain specific provisions on bonuses and commission so issues or conflicts related to bonus and commissions are usually solved by labour court on a case by case basis.
Incentive plans are more commonly offered to sales roles and leadership roles. Sales roles and leadership roles usually have explicit pay outs tied to specific deliverables. By contrast, engineering and accounting roles are less likely to have high amounts of variable pay.
Incentive plans are commonly granted to different types of employees in Colombia. The above, considering Colombian Labour Law has authorized employers to grant to its employees such incentive plans or non-mandatory benefits. Granting non mandatory benefits imply the possibility for employers to increase the employee´s income but with a smaller impact on the employer´s costs, since most of those non mandatory benefits may be excluded from the base to calculate other labor related obligations such as social security contributions, payroll taxes, fringe benefits, severances, among others.
Companies usually establish different benefit plans according to the different levels of employees within a company. Management or directive employees are usually granted benefits such as signing bonuses, performance bonuses, stock options, company car, country club membership, vacation periods that exceed those granted legally by local labor law, among others.
Non-management employees are usually granted benefits such as food and transportation allowances, annual bonuses, and additional health insurance.
In the broad sense of the term, the most common incentive plans are bonuses in cash related with the fulfilment of commercial and performance targets. Usually they are granted to senior management and key employees whose functions can influence the company’s results.
Stock options plans are not widely used. They are more common in companies belonging to international groups and in the financial sector, especially for directors and high level managers. This kind of incentives is very rare in the national medium and small-sized companies (which largely prevail in Portugal), although some technology companies offer stock options plans to a broader range of employees.
Share saving plans are even rarer (see question 2.).
Incentive plans are an increasingly widespread remuneration tool in Italy.
At present, the most widespread ones are agreements providing - under company or territorial collective agreements - for the payment of performance bonuses paid by the employer to its employees upon achievement of specific objectives.
As regards tax treatment, Performance Bonuses for employees in the private sector are currently regulated by Law no. 208/2015 (Stability Law 2016), which provides for reduced taxation at a rate of 10% instead of the ordinary and additional personal income tax.
The amounts on which the said tax (“substitute tax”) is applied do not contribute to the formation of one’s total income and, therefore, are not relevant for the purposes of determining deductions commensurate with it, such as, for example, deductions for family loads or deductions for income from employment; since these latter are calculated in decreasing proportion to the total income, they will be due for a higher amount.
Another form of incentive is the so-called "company welfare", which consists of services, works, and services paid to the employee in kind or in the form of reimbursement of expenses, having purposes of social importance, excluded from the income of employment. Law no. 208 of 2015 and subsequent amendments have extended the hypothesis of amounts and values that do not contribute to the determination of the income of employees, through a systematic intervention of art. 51 of the Consolidated Income Tax Act (“TUIR”).
In particular, paragraph 190 of article 1 of the aforesaid law has made changes to the rules governing the income of employees, which are also relevant to company welfare plans or flexible benefit plans, or plans that provide employees with a basket of benefits they can choose among, according to their needs.
These amounts and values can be summarized as follows:
a) services, works, goods and services (paragraphs 2 and 3, art. 51 of the TUIR, so-called corporate welfare:
- payment of contributions to supplementary pension schemes;
- payment of health care contributions to bodies or funds whose sole purpose is to provide care services;
- use of services replacing the canteen service (so-called meal vouchers or tickets);
- use of transport services or purchase of local, regional, or interregional public transport passes;
- use of works and services for education, training, recreation, social and health care or religious purposes, for the attendance of rec centers and summer and winter centers, and for scholarships;
- use of care services for elderly or dependent family members;
- payment of contributions or premiums to cover the risk of non-self-sufficiency in the performance of daily activities or those relating to the risk of serious illness;
- allotment of shares in the company/employer or group companies.
b) fringe benefits (TUIR, paragraph 4):
- company vehicles;
- granting of loans;
- lease, use or loan of buildings;
- free travel for employees in the railway sector.
Conversely, incentive plans based on share options, share acquisition or share purchase are not used on a large scale in Italy because the applicable tax regime reduces the related reward, making the incentive itself ineffective.
The most prevalent type of monetary incentive plan in Turkey is bonus paid monthly or annually. For most of the employees this bonus may be calculated as sales commission calculated upon good or services sold to customer or the employees may receive project bonuses from the work performed with their team. The highest ranked employees may also benefit from profit sharing. Some of the companies also establish funds and trust to financially support employees.
Within the last decade with the new commercial code mostly high ranked employees as executives, key personnel so on and so forth, started having incentive plans as share options and share purchase plans. However, these options are still narrowly implied in Turkey and least popular incentive plans due to the lack of legislation. They are offered mostly by foreign companies doing business in Turkey offering shares of the foreign mother company in line with the globally implied plans and/or publicly traded Turkish companies.