Whilst employee incentive plans of varying forms have been utilised in the US, UK and other parts of the world for decades, they have not been widely acknowledged in Asia until recent years. In particular, there has been an increase in businesses, from start-ups, most notably in the FinTech industry, to larger listed entities across a diverse range of industry sectors, in adopting some form of employee incentive plans, as a way to incentivise and retain high calibre employees, encourage loyalty and to attract top quality people to join businesses.
When the interests of employees and the shareholders of a company are aligned, employees tend to be more motivated, feel a greater sense of belonging and demonstrate loyalty and commitment to the company and its performance – a benefit to both employee and employer. There may also be benefits from a tax perspective, depending on the timing and schedule of vesting. Generally speaking, business performance is enhanced when employees have a stake in the business.
Common forms of employee incentive plans
Employee incentive propositions often involve the use of shares in the employing company or a company within its group. More familiar plans include employee share option plans ("ESOP"), whereby employees are granted a right (but not an obligation) to purchase a defined number of shares at a fixed price on a specified date or during a time window in the future and restricted share plans ("RSP"), which involves shares being awarded to an employee at a discount or for nil consideration and typically will include a vesting period and, in some cases, performance conditions.
The choice of employee incentive plan would be driven largely by the employer's objectives, taking into account factors such as the existing and anticipated share structure and business plans of the company, the intended beneficiaries and applicable legal and tax issues.
To assist in the facilitation of employee incentive plans, employee benefit trusts ("EBT"), a form of discretionary trust, have gained popularity among Asian clients.
The trustee of the EBT holds assets, typically shares in the company, on trust for the benefit of employees of the company (or its group) as beneficiaries. Whilst such beneficial class is typically wide, it is possible for the trust to benefit a selected group of employees only (e.g. senior management).
The trustee would normally be guided by recommendations from the company, through its plan committee, as to which employees, or groups of employees, to benefit and when (for example, after satisfaction of certain vesting conditions based on criteria such as performance milestones or specific vesting schedules). However, the trustee would usually have wide powers under the trust deed in relation to the trust's operation and administration, including the type of awards to be delivered to the employees. Awards may be in the form of shares (to be transferred from the trustee to such selected employees), or if the company is liquid, cash (through the sale of shares released on behalf of the employees).
The EBT can also be used in the facilitation of cash plans, including as a mechanism for the hedging of phantom awards – cash awards where the benefit is tied to the value of the company's shares, often taking the form of phantom options or a share appreciation rights plan.
Advantages of offshore employee benefit trusts
Whilst often established primarily for the purpose of assisting companies' hedge their share or cash awards in a manner ensuring that assets are sheltered from Capital Gains, there are a number of advantages to using an EBT.
Due to the flexibility of EBTs their use can differ significantly depending on the company and its objectives. This flexibility allows for the uses to be tailored specifically to ensure that the company's goals in relation to incentivisation, motivation and retention of employees are met and can the EBT can evolve alongside the evolution of the company, including through an IPO or similar event.
The assets held in an EBT are bankruptcy remote, and thus even if the company goes bankrupt, these assets are not accessible by the company's creditors but would remain in the EBT for the benefit of the beneficiaries.
Typically used as a hedging tool for listed companies, but also often for private companies, the trustee of an EBT can acquire shares at any time for the later use in satisfying awards granted to employees. If you consider that vesting periods for awards will usually be between two and ten years the ability to hedge the liability of the satisfaction of them can save companies vast sums of money.
In addition, an EBT can create an internal market for shares of private companies, whereby the trustees can acquire such shares (for consideration or not) from employees leaving the company, and recycle them for future award satisfaction.
Furthermore, it is common for the trustee to act as nominee for employees where the beneficial interest in shares has been passed to them, be that following an award vesting event or in instances where the beneficial interest in shares in the company has simply been passed onto them. So long as the shares are being held by the trustee, be that as nominee or not, such concentrated shareholding facilitates the acquisition of shares by a potential acquirer, who only needs to deal and sign documents with the trustee counterparty, rather a number of employees.
Last but not least, in certain jurisdictions, EBTs can be a tax efficient means of providing long term benefits and incentives to employees and their dependents.
Moreover, a specialist third party independent trustee is appointed for an EBT and is required to act in the interests of the beneficiaries, thus giving comfort to beneficiaries that their interests are being looked after, avoiding any potential conflicts of interest where an entity related to the company acts as trustee. Such a trustee can also engage other professional advisers to consider any tax implication, foreign exchange controls and restrictions on holding or receiving shares by employees in different parts of the word and where necessary to distribute cash to such employees in lieu of shares.
Trend and outlook in Asia
We have seen a marked increase in the adoption of EBTs in the new technology and innovation industry for start-ups in Asia. Given the advantages of utilising offshore EBT's in the implementation of employee benefit plans to facilitate employee incentivisation and retention, asset protection and sometimes for tax purposes, we would expect EBTs to become a powerful tool for companies in providing benefits to employee beneficiaries in the Asian market.
Appleby Global Services
Appleby Global Services ("AGS"), an affiliate of Appleby, provides trustee and administration services in respect of EBTs. The Employee Incentives team at AGS has significant experience in providing specialist trustee and ancillary services to a vast array of companies, from start-ups through to some of the largest global companies, helping clients maximise the value of their employee incentive proposition.
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.