Acquiring and retaining key members of staff is arguably the greatest challenge facing Irish based employers currently. Incentivising employees, whilst securing adequate levels of protection for both the business and it’s key stakeholders is a balancing act that most growing businesses face.
Employee incentive plans can be structured using various methods including share-based remuneration. Tax treatment is often one of the most important considerations and a key factor to the implementation of a successful programme.
The Key Employee Engagement Programme (KEEP) offers a solution to employers who wish to award employees with the opportunity to earn an incentive bonus without them necessarily becoming long-term shareholders in the company.
How the programme works
KEEP applies to qualifying share options granted between 1st January 2018 and 31st December 2023.
The programme entitles employers to award a bonus incentive, contingent on appreciation of the company’s share price value that is not subject to Income Tax, PRSI or USC.
Instead the employee is subject to capital gains tax (CGT) (currently 33% as opposed to a potential for 52% under Income tax treatments) on the ultimate disposal of the shares.
The shares must be fully risk-bearing, unquoted, ordinary shares that carry no preferential rights to dividend or value. The employee is granted an option to acquire the shares at market value and if, by the time the employee exercises the option, the shares have increased in value, they are not subject to Income tax on the increase at that time.
The option cannot be held for longer than 10 years and cannot be exercised within the first 12 months of the grant. The option must not exceed 50% of the employee’s salary or €100,000 per annum. Furthermore, the total options granted to an individual employee over a three-year period must not exceed €250,000.
The qualifying employee or director must be required to work more than 30 hours per week in a position that is capable of lasting for more than 12 months. In addition the employee or director cannot own more than 15% of the ordinary share capital of the company.
The qualifying companies must be classified as micro, small or medium sized enterprise. While there are also some additional restrictions on certain industries and company structures.
When is KEEP most effective?
There is no doubt that providing employees with an option to benefit from future share price appreciation is an innovative approach which further incentivises the employees to perform.
However, as with any share-based remuneration scheme, much of the success will be determined by the method used to implement the scheme and by having clear objectives in place for implementing the scheme. We can assist you with the necessary professional guidance to ensure your KEEP programme implementation is effective and successful.
The most effective use of KEEP is when the objective of the employer is to extend the benefits of share-based remuneration to a wider group of employees without them necessarily becoming long-term shareholders in the company. Once the employees exercise the option there is no requirement for them to retain the shares for a minimum period of time.
In practice, employees tend to quickly sell the shares to realise their value meaning employers can continue to extend the option to a wider group of employees without greatly expanding the shareholder base.
If you are thinking of developing an employee incentive scheme using KEEP or other schemes, please contact us for assistance.