There are many ways to engage employees and involve them in your company’s success. This might be as simple as a tap on the shoulder, but more structural approaches via adjustments in primary and secondary employment conditions are also possible. Given the importance of employees perceiving these efforts as meaningful rewards, it’s essential to take their preferences and perceptions into account.
When it comes to financial incentives, most people think of salary increases or bonuses. But there are also reward structures that allow employees to participate in the company itself. What are these options, and what could they mean for your organisation?
There’s a wide range of possible reward structures, each with its own legal, financial, and tax implications. These can also be tailored to suit your goals. Below are six commonly used forms in practice:
Profit-sharing is the least far-reaching form of participation, while issuing shares is the most far-reaching. The other options fall somewhere in between. We’ll briefly explain each of them below.
A profit-sharing scheme is an additional form of remuneration on top of an employee's salary. It is relatively easy to implement and can be effective for a broad group of employees. Keep in mind, however, that this “bonus” is taxed in Box 1 at the progressive income tax rate.
The key question is whether this form of compensation creates enough retention and engagement. Some groups of employees may require a more targeted or enhanced incentive.
With an SAR (Stock Appreciation Rights) scheme, employees benefit from the company’s valuation growth or rising share price. Employees share in the value increase without receiving actual shares. Instead, the appreciation is paid out to employees at specific moments in time.
SAR schemes are often used by:
These businesses often cannot, or choose not to, distribute profits annually due to liquidity constraints. The benefit the employee receives through the SAR is taxed in Box 1 at the progressive rate.
A profit certificate is often compared to a “stripped-down” share. It entitles the employee to a portion of the company’s profits, without granting any voting rights or control over the business.
A profit certificate can be arranged through a simple contract and does not require a notarial deed. Under certain conditions, the employee may be able to declare the certificate in Box 3.
With this type of incentive, the employee does not receive shares, but is granted an option to acquire them in the future. When the option is granted, conditions are set under which the employee may exercise the option and convert it into shares.
For example, the option may become exercisable after reaching a specific revenue target or after five years of employment. Once these conditions are met, the employee can exercise the option and acquire the shares.
The tax treatment of options is a key aspect. Depending on the structure, taxation may fall under Box 1, Box 2, or Box 3. Accurate valuation and a clear understanding of the applicable tax regime are essential.
If an employee also becomes a shareholder in your company, they are entitled to:
A shareholding arrangement is therefore considered the most far-reaching form of employee participation. Valuing the shares at the moment of acquisition is a crucial aspect. It's essential to clearly define in advance the terms under which employees may, or in some cases must, purchase or sell their shares.
Shares may be taxed in Box 1, Box 2 or Box 3.
The tax treatment of depositary receipts for shares is largely similar to that of regular shares. However, there is one key difference: by using depositary receipts, voting and meeting rights can be restricted or even excluded. The employee still benefits from profit entitlement and value appreciation.
When choosing the right remuneration structure, it’s important to consider:
Even after deciding on a particular form or forms of remuneration, there are still several steps to take, including valuation, deciding on the terms, a preliminary consultation with the Tax Administration, and coordination with a notary. We’re here to guide you and take care of the tax complexities, so you can focus on what truly drives you.
