Turkey: How To Incent And Retain Your Company’s Employees? USA Vs. Turkey

Last Updated: 25 September 2014
Article by Güzin Civelek

In countries like the United States, many companies rely on employee incentives to achieve their long-term financial goals via maintaining a satisfied and motivated workforce. The employee stock option (ESO) is one of the popular incentives that attract and retain the employees for the goal of increasing such company's share value. Thus the ESO is essentially a call option that the company grants to an employee on its ordinary shares as part of the employee's remuneration package. In addition to achieving long-term financial goals, companies issue ESOs to generate and maintain cash flow. In practice, ESO is commonly offered to employees at the management level.

ESO is regulated by 26 U.S.C. § 423, under the title "Employee Stock Purchase Plans." This set of regulations can be found in the Internal Revenue Code, which is officially known as Title 26 of the United States Code. Currently, Turkey does not have an equivalent to U.S. federal law regarding ESO. However, as a share transfer, ESO shall be interpreted in accordance with Turkish commercial, obligations and capital market legislation.

In the U.S., the ESO has become a frequently used tool for the employee compensation, especially upper-level or executive management. Over 80 percent of the 500 biggest quoted companies have introduced employee stock option plans. According to the National Centre for Employee Ownership (NCEO), there are around 3,000 broad-based stock option plans in the country, and 86 percent of employers in the country offer stock options to employees. In 2000, 19 percent of all employees were eligible for stock options, compared to only 12 percent in 1998. Ultimately, in the U.S., stock options constitute a much more important share in managers' pay packages than in other countries.

An employee stock purchase plan is a tax-efficient means for employees to purchase the corporation's stock, which is often done at a discount. For example, the discount might be 10 percent off on the stock's fair value market price at a certain date determined by the plan.

According to 26 U.S.C. § 423b, an employee stock purchase plan has to meet a substantial list of requirements. For example, employees contribute to the plan through payroll deductions, which build up between the offering date and the purchase date. At the purchase date, the company uses the accumulated funds to purchase shares in the company on behalf of the participating employees. Although the amount of the discount depends on the specific plan, it can be up to 15 percent lower than the market price.

Depending on when the employee sells the shares, the disposition will be qualified or not qualified. If the position is sold two (2) years after the offering date and at least one (1) year after the purchase date, the shares will fall under a qualified disposition. If the shares are sold within two (2) years of the offering date or within one (1) year after the purchase date, the disposition will not be qualified. These designations have differing tax implications.

In accordance with the Turkish Commercial Code (TCC) numbered 6102, joint stock companies are allowed to a certain extent to acquire their own shares. According to Article 379 of TCC, a company shall not acquire its own shares or accept the same as pledge as a result of a transaction which exceeds or will eventually exceed a tenth (1/10th) of such company's declared or issued capital. Also, this provision is applicable to the shares that are acquired or accepted as pledge in the name of any third party, but for the account of said company.

According to the second paragraph of the Article 379, for the acquisition or acceptance of the shares as pledges in light of the preceding paragraph, the board of directors of the acquiring or accepting company shall be empowered by the company's general assembly. Such power shall be granted for a maximum period of five (5) years. Moreover, the total par value of the shares acquired or accepted as pledge shall be explicitly specified, and the maximum and minimum amount to be paid for such shares shall be clarified. With each permission request, the board of directors shall declare that the legal requirements have been fulfilled.

Although the TCC regulates the company's acquisition of its own shares, the code's Article 522 permits the establishment of social welfare foundations that enable the employees to participate in the company. Pursuant to this regulation, capital reserves may be allocated for distribution to public corporate entities. The goal of such action is to establish relief organizations or maintaining the same for the employees and workers. A trust or cooperative shall be established for the capital reserves dedicated to assistance and other assets exported from the company. In the Articles of Incorporation, the assets of said trust may be determined as a receivable against the company. If any contribution is received from management, employees and workers apart from the capital reserve that is allocated by the company to such end, at the end of such business relation. If the employees and workers could not benefit from the differentiation based on the trust's Articles of Incorporation, such employees and workers shall be paid at least the amount they had contributed with the legal interest accrued starting from the date of contribution.

For compliance purposes, increased capital may be supplied by the social welfare foundations—provided that it is stated in the Articles of Association of the company. In this regard, the shareholders of the company shall waive their preemptive rights to purchase the new shares. As a result, the foundations established by the capital reserves can acquire the newly issued shares.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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