What other forms of long-term incentives (including cash plans) can be offered?
In lieu of granting NQSOs, companies sometimes grant “stock appreciation rights” (“SARs”). SARs provide the same economic benefits of an NQSO but do not require a participant to tender the exercise price.
So-called “phantom” share plans are popular with private companies where the owners do not wish to give employees voting rights or access to books and records. In such cases, employees will obtain the economic benefits of any share appreciation as if they were owners of common (ordinary) shares, but the awards will be settled in cash.
Private equity-backed portfolio companies (often organized as LLCs) usually award profits interests.
Most equity plans of US corporations are “omnibus plans” meaning that they authorize all forms of equity participation including NQSOs, ISOs, RSUs, PSUs, restricted stock and SARs.
It is becoming a trend in Mexico establishing long-term incentive plans in the form of equity programs, where the employees/participants will share the risk or benefits of the business in Mexico, regionally or globally. Because there are limited possibilities to defer the obligation of paying taxes on long-term incentives, there is not a relevant variety of plans or programs in Mexico.
Please refer to our answer to question 1.
An employee can be offered a long-term bonus plan based on the employee’s performance or the Company’s collective performance.
Such bonus plans are, normally offered at the employer’s sole discretion in regards to under which circumstances the employee can be entitled to a bonus payment.
A bonus payment is subject to section 17a in the Danish Salaried Employees Act.
- Cash-based plans can consist of gradual salary increases during the worker’s time of service with the company.
- A worker’s performance or contribution to accomplishing the company’s annual goals could be a factor for a bonus.
- Any other mutually agreed criteria or criteria offered by the company for receiving incentives (i.e. study plans financed or payed by the company).
The long-term incentives including but not limited to the following forms, signing bonus, deferred bonus, household registration quota, usage or ownership right of the house or car, supplementary pension, occupational pension, interest-free loan, professional training, etc.
Management incentive plans of/on companies held by private equity (LBO, promote shares, profit-sharing loans, ratchet shares, carried interest etc.) may well qualify as ‘lucrative interest’ for Dutch tax purposes. Lucrative interests require a lot more of attention from a tax perspective than ordinary equity incentive plans. It is common practice that lucrative interest plans (as well as plans that may qualify as such) be discussed in advance with the tax authorities and the outcome hereof be confirmed in a ruling.
A lucrative interest can generally be described as an interest in a company (such as shares, receivables or any other rights), either directly or indirectly held by an individual, the benefits whereof (yield, capital gains), as may reasonably be considered, are also intended to remunerate the individual (or the spouse or a close family member of the individual) for work. Such work can be under any type of engagement, not necessarily an employment. The remuneration objective may, inter alia, be satisfied if the interest potentially offers a disproportionally high return, i.e. a return that would not be available to other investors without an engagement for work (sometimes referred to as ‘sweet equity’ or concisely ‘envy’). As a main rule, any benefits from a lucrative interest are taxed progressively with income tax (up to 51,75%, for 2019). If a lucrative interest is held by the individual indirectly, through a holding company in which he is holding a substantial interest (i.e. > 5% interest in (any class of shares of) such holding company), AND at least 95% of the benefits from the lucrative interest are distributed in the same calendar year by the holding company, such that they generate income from a substantial interest, progressive income taxation is replaced by taxation under the substantial interest regime, which is at a flat rate of 25% (2019). Proper structuring is key here, e.g. to avoid corporation tax on the benefits in the holding company, by observing the conditions of the participation exemption.
As a rule, there are two types of long-term incentives in Brazil: the one paid with stock option/share, and the other that is cash based.
For cash plans, the companies usually set up a differed payment upon performance evaluation and achievement of certain goals. The tax treatment in this case depends on how the plan is structured. Usually, the tax burden will levy in the moment the participant attends the conditions to become entitled to an award.
In addition, although it is considered more as a short-term incentive, there is a law that permits employers to pay compensation to their employees upon attaining certain goals under a sharing plan based on the company's profits or results. This compensation is exempt of social security contributions.
The plan that defines the terms for distribution of this compensation must meet certain proceedings and elements as defined by the law and case law – in short:
a) The plan must be drafted by means of an internal committee or through direct bargaining with the employees' union
b) If by means of an internal committee, this committee needs to be formed by representatives of the employer and employees, and a representative of the employees' union must be called to participate in the negotiations (although the union representative is not required to attend it)
c) If through direct bargaining with the employees' union, the employer and union must execute a collective bargaining agreement for the purpose of establishing a sharing plan based on the company's profits or results
d) The law and case law require objective criteria in the definition of the terms and conditions of the plan (including but not limited to eligibility, goals, performance evaluation, payment methods, etc.)
The benefits of introducing such plan is twofold: on the employer's side, it prevents the payment of social contributions (average rate is 28.8%); on the employees' side, the income tax applied to such earnings is smaller as indicated in the table below:
Up to 6,677.55
From 6,677.56 to 9,922.28
From 9,922.29 to 13,167.00
From 13,167.01 to 16,380.38
In a conservative payment scheme, age is considered the most significant factor for determining the employees’ position in the rank-hierarchy and it reflects their wages, especially the base salary scheme. It is considered one of the core elements of the life-time employment style and is connected to the long term incentive for employees since the length of service period tends to be proportional to the increase of salary. There are numerous companies that still adopt such a payment scheme, especially in the manufacturing industry. A retirement allowance system could be a form of long-term incentive since the retirement allowance reflects the service period. Looking at the bonus scheme, Japanese companies have changed their trends of bonus scheme from long-term incentive to short-term incentive such as bonus linked to individual performance.
One may also design derivative incentive plans (phantom stock, appreciation rights etc.) that measure on a certain underlying asset or reference value. The derivatives may be structured as independent financial instruments. Derivative incentive plans measuring on the share value of the company could be an alternative to above-mentioned share plans.
Phantom options/share appreciation rights
Phantom options are rights to receive cash payments that relate to the value of real shares. Typically participants will receive cash bonuses where the amount payable is based on growth in value of a notional parcel of shares. Phantom options are a discretionary form of employee incentive which some companies prefer to use rather than real shares because issuing new shares would dilute the interests of existing shareholders.
Deferred bonus plan
A deferred bonus plan is a discretionary form of employee incentive plan, under which part of a participant's bonus will be paid in shares which must be retained for a period of time (usually three years). The issuer company may provide a matching element subject to the participant remaining in employment and certain performance conditions being met. Deferred bonus plans will usually involve non tax-favoured share options.
Besides the plans mentioned above, the company can offer:
- Bonus or target agreement (within one year)
- Company profit participation (also within a one year circle)
- Company pension scheme
- Annual working time credit
Several kinds of long-term incentives plans can be offered. The most common are the free-shares that may be set up by any company, whether listed or not. Such plan which allows 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). The beneficiaries and conditions for granting shares must be defined in the plan. The scheme, when it meets the conditions set out by the French Commercial Code, is subject to a preferential social and tax regime.
In addition to free shares plans and stock-option plans or incentive bonuses in cash, which are the most common, phantom shares plans or share purchase warrants may also be offered as long-term incentives. In practice, these plans are less frequent.
In addition to bonus, commissions and incentives, companies may offered retention awards as cash plans. Retention bonus entail the payment to the employee (normally managers or executives) provided that he/she remains in the company on a given date. Retention bonus are usually implemented in the case of merges or acquisitions as a tool to retain the employee during the transaction period.
In addition to share option plans or stock options plans, companies may also offer restrictive stock units. Similar to options, there’s a vesting period where the employee must satisfy certain conditions before the stock or its value is transferred (typically, there is a period of time and other conditions – e.g., work performance). Unlike stock options, there is no purchase involved. Instead, a certain number of units are allocated – or granted – to the employee, but there is no value or funding until the employee has satisfied the vesting requirements. After vesting, RSUs are transferable if the employee accepts the grant. The value of the RSUs is the closing market value of the stock price on the vesting date.
As previously mentioned, stock option plans are not common among Colombian employers, thus, other long term incentives are frequently used by employers as incentives. Annual bonuses are the most common cash plans. Companies offer as well, contributions to a saving fund, whereby, if the employee saves part of its salary in such fund, the employer will perform an additional contribution.
Monthly payments destined for food, transportation or cell phone plans are normally included in an incentive plan.
In some cases, employers perform indirect payments to third parties as a benefit to their employees. Such is the case of school allowance paid directly to education institutions for the employee´s children, gym memberships, country club memberships, and car leasing or renting.
In general, all long-term incentives (such as cash plans, share saving plans, performance bonus) are permitted, provided that the mentioned conditions related with the company´s type and its by-laws and shareholders agreements are observed.
Retention bonus are also admissible but they must be structured in order to assure its compatibility with the legal restrictions regarding minimum-stay clauses, which are only allowed if the restriction on the employee´s freedom to withdraw from the contract represents a form of compensation for exceptional expenditure by the employer on the employee´s training. Therefore, the bonus should only be granted after the employee remains in the company on a given date. If it is granted in advance, subject to a minimum service period, it will not be possible to oblige the employee to return the bonus since it can’t be deemed as a minimum-stay clause.
In addition to the above, there are other forms of performance incentives.
In particular, among the most common ones, there are:
- performance awards;
- the so-called corporate welfare.
For the regulation of these two forms of incentives, see question 1.
Other forms of long-term incentives adding to the stock options (restricted stock options, stock appreciation rights, phantom stock, stock purchase plans) may be cash plans, bonus plans, profit sharing plans. There are not any specifically regulated plans under Turkish Law but different plans are applied by companies.
Adding to this, with the amendment in 2016, employees under 45 years old must be enrolled to private pension plans by the employers. The basic contribution for the plan is 3% of the employee’s gross average earnings subject to social security premiums. The employee who has been automatically enrolled in a private pension plan will be entitled to withdraw from the plan within two months as of the notification of the enrolment.