Employee Share Option Plans ("ESOPS") are employee benefit schemes that allow such to gain ownership in the company through shares options and retention mechanisms. These plans offer a win-win arrangement whereby employees are rewarded for their contributions, and companies benefit from more engaged and committed team members. There are several types of ESOPS, each with distinct structures, implications, and eligibility criteria. Understanding which ESOP structure that best aligns with your company is key to maximising the value a company may provide and the benefits an employee may derive from working with said company
Why Offer an ESOP?
- Retain Top Talent – ESOPs offer employees a strong incentive to stay, grow and contribute to a company when they have a real stake in its success.
- Tax Advantages – In many cases, ESOP-related gains are taxed more favourably;
- Attract the Best, Because You Are the Best – The most innovative individuals want to form part of something meaningful. Offering equity is not just a perk, it is a signal that your company values long-term contributors and is committed to shared success
What types of ESOPs may be offered?
Below are some commonly adopted ESOP schemes:
- Share options: the company grants the employee the option to purchase shares at a future date and at a pre-determined value.
- Share loans: company provides loans (which may/may not be interest free) to the employee to purchase shares at market value.
- Performance linked shares: the company grants the employee shares once specific targets are met.
- Phantom shares: the company provides a cash payment to the employee which mirrors the company's share price and/or dividend.
- Escrow: the company transfers funds or assets to a third-party escrow agent to hold on behalf of employees, and which will be released upon the satisfaction of pre-determined conditions.
- Employee benefit trusts: the company sets up a trust to hold and manage assets, such as, shares and bonuses.
NB: An employee may benefit from only one ESOP scheme at a time.
What happens upon departure?
The way in which an employee exits the company has a direct impact on their ESOP entitlements. This is governed by the Good Leaver/Bad Leaver provisions.
A "Good Leaver" is generally an employee who departs under acceptable circumstances.
An employee may be classified as a good leaver if, amongst others, they:
- Pass away;
- Depart on grounds of permanent incapacity due to ill health or injury as certified by a qualified medical practitioner;
- Resign or give notice to terminate their employment after more than six years from their employment start date; or
- Dismissal for any reason other than for 'good and sufficient cause'.
Being classified as a Good Leaver allows the employee to retain some or all of their ESOP benefits, depending on the terms of their plan, and the agreement that they have made with the company.
A "Very Bad Leaver" is generally an employee who departs for any of the following reasons:
- They are dismissed, at any time, for a 'good and sufficient cause';
- After their employment has ended, it is discovered that grounds existed for dismissal for 'good and sufficient cause';
- They breach, either before or after leaving, any restrictive covenants under their employment contract (including, for example, non-compete or non-solicitation provisions);
- After leaving employment, they take any action that causes material damage to the UBO (or their associates) or the defined investments.
In such cases, the employee's ESOP benefits will terminate immediately upon departure and no further entitlements will accrue or be payable to the employee.
A "Bad Leaver" is generally an employee whose employment ceases in any manner that does not qualify as a Good Leaver but also does not meet the criteria of a Very Bad Leaver.
An ESOP, therefore, is not just a benefit, it is a powerful tool to attract, retain and motivate your best people whilst building long-term value. With an ESOP everyone wins.
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.
