Employee incentive programs

What kind of income can be provided under securities benefit based incentive programs?

The main goal of these systems is to strengthen ownership in employees and their commitment to the company and to give an opportunity for the company to promote these in a favourable form. This is typically achieved by providing income to employees from the company's profit in the form of a dividend or from the growth in company value in the form of capital gains achieved through the selling of the securities received as a benefit but there are also incentive systems allowing the granting of different income.

Depending on the opportunities of the company and the intentions of the owner, incentive programs can be developed granting benefit to employees based on only one aspect but also systems, which grant a share of both profit and growth in company value. 

How much saving can be achieved by introducing an employee stock ownership plan?

* Assuming that the employee reaches the cap on social contribution payment obligation taking other incomes into account.

What other advantages can be achieved through a securities benefit based incentive program?

With an incentive program, it is not necessarily and not exclusively the granting of favourably taxed income, that is a cheap solution that matters for the employer but in many cases, the keeping of employees and their motivation to higher performance. There are several options among securities benefit based incentive systems for which it is a statutory condition to determine certain future goals or to define conditions for providing the benefit. However, combined with solutions for rewarding the loyalty of employees, in a much less regulated system and applying various option rights, these can also be developed flexibly in almost all cases.

In the case of the so-called employee securities benefit program defined by the Personal Income Tax Act, for example, a compulsory retention period is required, as a result of which, the employee can only receive cash income from the securities received under the program at the end of the second year from the date of receiving the securities benefit.

ESOP-s for remuneration purposes typically come with the condition that the providing of the income must be subject to an improvement in the economic performance of the company setting some kind of objective indicator for this purpose. In addition, the ESOP regulation also provides for a compulsory retention period.

Customized securities benefit solutions

Regulation allows various kinds of securities benefit determining substantial differences between individual types.

The three main benefit types are:

• ordinary shares (remuneration ESOP, employee securities benefit program and traditional ordinary share benefit as well as share options), 
• preference shares (for employees and/or owners), 
• employee shares. 

The various incentive programs come with different opportunities regarding tax benefits, costs, administration and in terms of the securities, guarantees offered to the owner. 

The most important differences can be defined along the following aspects:

• the group and headcount of employees covered by the benefit, 
• the rights (e.g. voting rights) that the benefit assigns to the group of employees concerned, 
• are the group of rights relating to each participant and other relating rules fixed or flexible, 
• what tax benefits and tax obligations do the introduction of the program, a potential partial or full termination of the program and the payment of incomes generate on the employer's and the employee's side, 
• how complex is the system of conditions and the operation of the benefit, 
• what is the cost of introducing and maintaining the program, 
• what safety solutions can be integrated for the owner. 

A customized incentive program that is the most efficient and poses the lowest level of risk can be developed for any company applying the above benefit forms. The various solutions allow for the introduction of different conditions and different rules, which may, in certain cases, lead to a change in the ownership rights exercised by the original shareholders. 

It is apparent from the above that the introduction of a securities benefit based incentive system is a rather complex task. To develop the most favourable solution, it is important to assess all material circumstances, to specifically define the goals to be achieved and to carefully plan implementation. However, we can declare that a properly developed program can support the company's employee retention, growth, long-term profitability, and efficiency and thereby also the maintaining and growing of owner incomes very effectively. 

How can the introduction of a customized securities benefit based incentive system be prepared?

• Our qualified and experienced experts present the advantages and disadvantages of the various incentives systems available, regulatory considerations and potential risks. 
• They assess the company's needs, the goals to be attained and give support for the selection of the applicable incentive system.
• If requested, we prepare a comparative analysis of the selected incentive system examining, among others, the expected costs, administrative burdens, the overall tax burden, feasibility. 
• After the decision is made, we prepare a customized material for the company describing the entire process of the incentive system to be introduced.
• Among others, we prepare the necessary policies, company documents as well as the generation of shares taking the unique needs of the provider into account. 
• If requested, we provide information to the employees participating in the program and/or prepare a written summary of the regulations concerning them. 

If you are interested in securities benefit based employee incentive programs or perhaps in other tax planning opportunities, do not hesitate to contact us. 

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