All You Need To Know About Employee Equity Plans

An equity or shareholder compensation plan is a type of employee benefit used as a way for companies to offer their employees (or executives) the opportunity to purchase shares in the company, often at a discounted rate. This can be done either with pre-determined allocated amounts, which are then deducted from the employee’s payroll; or through profit sharing, which may come as bonus payments or commissions.

         1.Are all plans mandatory, and how exactly do they work?

There isn’t such thing as a ‘mandatory’ equity plan. Still, many companies prefer to include them within their remuneration packages so that employees feel rewarded for working hard and responsible for increased performance and long-term company growth. The general rule is that they are always optional and never compulsory.

Another consideration is whether the plan satisfies requirements under the Employee Share Plan (ESP) and esop Exemption, which provides an exemption from specific provisions of Chapter 6D of the Income Tax Act 2007 if certain conditions are satisfied. This essentially means that if any ESP awards made by a company do not exceed $5 million for each income year and other eligibility criteria such as limits on participation and benefits provided to employees, these awards will be regarded as exempt from tax.

       2.Are there different types of plans?

There are several important considerations when scrutinizing employee equity plans: how much you need to pay to purchase a share; whether this payment is required to be made immediately or can be deferred; the number of shares you can buy; and finally, the type of valuation method which will apply if you wish to sell your share.

There are two broad types of equity plans: employee share scheme and ISOs (Incentive Stock Options).

An ESPP is a defined contribution plan, and for employees (or their broker) to purchase shares, they must make an upfront cash payment equivalent to at least 20% of the value of the shares. The shares themselves cannot cost more than 15% of the employee’s base salary, less any amount already spent on previous purchases under this scheme. If an offer is made to a group of employees, the maximum number of shares offered cannot exceed 10% of the number of shares outstanding. The employee only needs to hold shares for one year to be exempt from capital gains tax.

Option plans are known as ‘non-compulsory, meaning that employees need not purchase the options if they don’t wish to. In anticipation of this, companies will often run both ESPPs and ISOs simultaneously, offering an additional carrot with the latter type.