Employee Share Schemes are being used more frequently by companies to align the various interests of shareholders and employees and also to ensure that everyone shares in the success of the company.

Typically, companies offer such schemes to their key employees and top management, however, there are no restrictions as to who receives these options and at what stage.

Types of schemes

There are various types of share schemes which companies use to achieve the interest-alignment of employees and shareholders. Some of these schemes include:

Share Options – the company would grant the option to employees to acquire shares at a future date, for a pre-determined value;

Share Awards – the company would grant shares to the employees once specific and predetermined targets are met;

Phantom Shares – the company grants the employees with the benefits of shares, without actually transferring or allotting shares to them.

Share option plans

Through share option plans a company would grant employees with an option to acquire shares in the company, or in an associated company, for a fixed, pre-determined price. The options could vest over a number of years, depending on the time the employee has been employed with the company.

The granting of the option is, typically, not a taxable transaction, however once the employee exercises the option, this could be deemed to be a fringe benefit and taxable accordingly.

Phantom Share Plans

Phantom Share Plans are being more commonly used nowadays to provide benefits to

employees, without the possible complications of having them as shareholders.

Phantom share plans are plans where the employee does not receive actual shares and does not become a shareholder of the company, but he/ she is entitled to the dividend as an actual shareholder. Every time a dividend is paid, the phantom shareholder will be entitled to a cash payment, typically in the form of a bonus, on a pro rata basis depending on the number of phantom shares held.

The value of the Phantom Shares will fluctuate with the company’s share value, and the

employee will be as invested in ensuring the company continues to grow and become profitable, as an actual shareholder

Company Valuation

Irrespective of which share scheme, or combination of, a company chooses to implement, getting the company valuation right is essential in ensuring that employees receive their shares, or options, at a price which is fair to them, given their past performance but more importantly, the expected growth of the company.

It is important to strike the right balance between providing employees with the possibility to acquire shares in the company lower than market prices, whilst at the same time ensuring that the price is fair when one takes into consideration the efforts, money and sweat equity which the original shareholders put into the company.

In most situations, such as in the case of share options, employees are given the right to acquire shares at a future date, sometimes even the option to acquire shares in tranches over a number of years. The valuation of the company is therefore important not just for the year in which the award is granted, but it is also key to provide a realistic projection of the growth of the business, and its value, over subsequent years.

The writer is a partner at Seed Consultancy, Malta, EU.

www.seedconsultancy.com

nicky@seedconsultancy.com