Research different types of employees incentive plans
Before implementing ESOPs, learning and understanding the other employee incentive plans within the countries you have your team members in is essential. There might be utterly different incentive plans available, or none at all.
Starting with traditional real equity plans, for example, ESOPs, warrants, or employee share purchase plans – ESPP, and ending with phantom equity plans, for example, virtual share option plans – VSOP, or share appreciation rights plan – SAR.
Even if in your headquarter’s country there is a very beneficial legal treatment of ESOPs, it might not apply to employees in other countries, and vice versa. So you need to do research on what is available in each country and how it would align with others.
You can create general terms for what you would expect from your company's employee incentive plan, such as whether it provides a grant of actual options to buy shares or just virtual shares, whether dividends are part of the incentive or not, would there be a holding period, or would there be an exit event as the main event to cash in gains from it.
Once you have figured out what kind of incentive you would like to provide your employees, it will be easier to align in each country. Alternatively, you can choose one of the employee incentive plans and see if and with what kind of requirements it can be applied to the rest of the team in other countries.
Consider taxes and social security consequences
Primarily, employee incentive plans are regulated within the laws and regulations of personal income taxes, whether there are some exemptions applicable or tax schemes available. However, they require certain conditions to be met to qualify. For example, some may require a minimum holding period of 36 months before an employee can exercise the options, or some may require notification to the local state authority on the conditions the plan has and even details of participants of the plan. As these conditions vary per country, so will the taxable events and the tax and social security consequences. Therefore, it is important to make sure you are aware of the type of taxes and social security contributions your company and employees will face and when. The taxes could already be at the grant of the options, during the vesting of the options, at the exercise of the options, or sale of the shares.
Compliance with local laws and regulations
In addition to the personal income tax laws and regulations, there might also be other laws and regulations governing the creation of the option pool, the grant of the options, or exercise of the options into shares, or even the sale of the shares. There might be some restrictions on how large the employee incentive pool can be. For example, commercial law may include the limitation of a maximum of 10% of the share capital to be attributed to the employee incentive plan. Also, employment law may require the employer to grant options in an equal manner between similar positions or specific limitations on termination. It is advisable to seek legal and tax advice if you choose to create an employee incentive plan to make sure that the work put into the creation of an employee incentive plan does not go to waste due to some non-compliance with local laws and regulations.
Consider foreign exchange rates
Similarly, as the salaries for your employees, the employee incentive plan may be affected by currency fluctuations if the share options are denominated in the company's headquarters currency, which is mainly the case. The fluctuation in exchange rates can have a significant impact on the value of share options in different countries. Consideration of mechanisms to manage currency risks or alternative solutions for currency denomination would be advisable, for example, a share option plan in the local country's company rather than the headquarters company.
Administration of the plan
One thing is to do research and then create and approve an employee incentive plan. Another is to maintain and administer the plan, sometimes even on a daily basis. This will include onboarding employees, granting of options, amendments to the plan or agreements with employees, termination processes, the exercise of the options, and the sale of the shares during exit. None of these are a one-time thing. They require resources at some point in time, a platform where to organise it all and a dedicated team member whose sole responsibility is to make sure the employee incentive plan works for the company and its employees. Therefore, plan your employee incentive plan, but also plan your resources, and consider a platform where you could manage your share options and make them transparent and understandable for employees.
As you can see, so far, there are many things to consider when implementing employee incentive plans for international teams:
- Educating yourself about what types of plans are available in your teams' countries will provide you with perspective on what plan would suit your needs the best.
- Vigilance around taxes and social security consequences will save you some headaches in the future.
- Making sure your plan is compliant with other local laws and regulations will help you gain the intended results.
- Foreseeing the effects of exchange rate fluctuations might help you explain the value of the options.
- Attributing resources to manage the plan in one place will provide transparency for the team about the success of the company and, thus, the value of their options.
And as we all know already, a well-designed and properly executed employee incentive plan can serve as a powerful incentive, fostering loyalty, motivation, and a sense of ownership among employees worldwide, ultimately contributing to the company's success.