Our managing partner Nezar Raees, discusses the benefits and complexities of employee share schemes, covering design, implementation and legal frameworks.
Employee share schemes have become an increasingly popular tool for companies seeking to align the interests of their employees with those of the organization. By offering employees an opportunity to acquire an ownership stake in the company, these schemes serve as a powerful incentive for fostering loyalty, enhancing motivation, and driving performance. The primary purpose of employee share schemes is to create a sense of ownership and shared responsibility, which can contribute to a more engaged and productive workforce.
Overview
An “employee share scheme” refers to various programs that allow employees and directors to acquire an ownership stake in the company, typically at a discounted price or, in some cases, for free. These schemes aim to foster a sense of ownership, align employee interests with the company's goals, and encourage long-term commitment and performance. By offering employees a stake in the company's success, such schemes can boost motivation and engagement, potentially leading to improved business performance. Depending on the scheme's structure, employees may either be given the right to purchase shares at a preferential rate or awarded shares outright, subject to specific conditions.
Employee share schemes can be tailored to meet a company's specific goals and objectives, with variations in several key areas. These include: (i) whether participation is mandatory or voluntary for employees; (ii) whether eligibility criteria are in place to limit participation to certain employees; and (iii) whether shares are granted with immediate vesting or subject to conditions that determine when employees can fully own the shares.
When designing employee share schemes, private companies face unique challenges compared to publicly traded companies. Unlike public companies, private companies must rely on specific valuation events, such as appraisals or corporate milestones, to determine share value, requiring regular valuation processes. Shares in private companies are also less tradable, so buyback provisions or exit strategies may be necessary to allow employees to realize value. The concentration of ownership in private companies can influence the number and type of shares offered and affect governance decisions. Additionally, private companies have greater flexibility in creating share classes, such as “Growth Shares,” which vest upon meeting specific conditions, enabling more customized schemes that align employee incentives with long-term business goals.
Types of Employee Share Schemes
Employee share schemes come in various forms, each designed to align employee interests with company goals. Below are the common types:
Save-As-You-Earn (SAYE). The Save-As-You-Earn (SAYE) scheme allows employees to save a portion of their salary over a set period, typically (3-5) years, to purchase company shares, often at a discounted price. The savings are used to buy shares at the end of the saving period, with the purchase price typically set at the scheme's start. In private companies, the share price is determined by a valuation.
Bonus Awards. Bonus awards involve companies granting fully paid shares to employees as part of their remuneration, often linked to individual or company performance. These shares align employee interests with company success, motivating them to contribute to growth. To encourage long-term retention, companies typically impose restrictions, such as a lock-in period during which employees cannot sell the shares. This ensures employees remain focused on the company's long-term goals. Bonus shares may also be part of broader incentive plans, enhancing employee engagement and retention.
Growth Shares. Growth shares are equity awards granted to employees or senior management that vest when specific performance or growth targets are met. These shares typically do not carry voting rights, allowing majority shareholders to retain control while offering employees a financial stake in the company's success. Once the set targets, such as revenue or profit goals, are achieved, the shares vest, and employees gain full entitlement to them. These shares are commonly used in private companies, offering employees the potential for financial gain without diluting shareholder control. However, it is crucial for companies to set realistic performance targets—too low and employees may lack motivation, too high and the targets may seem unattainable. Overall, growth shares effectively align employee interests with company success, fostering long-term commitment and performance.
Share Options. Share options allow employees to purchase company shares at a discounted price, typically after meeting time-based or performance-based conditions. This creates a financial incentive tied to the company's growth and encourages long-term commitment. Options generally include a vesting period, requiring employees to stay with the company for a set time before they can exercise their options. Performance conditions may also apply, such as achieving specific company targets, further aligning employee interests with organizational goals.
Phantom Options. Phantom options offer employees the financial benefits of share options without issuing actual shares. Employees receive a cash payout based on the difference between the notional share price (set at grant) and the market value at the time of exercise, aligning their interests with company growth. These options typically include conditions such as vesting periods and performance targets, encouraging long-term commitment and focusing on company performance. Unlike traditional share options, phantom options avoid share dilution, making them ideal for private companies or those seeking to avoid issuing equity.
Designing Employee Share Schemes
Before developing an employee share scheme, the company must assess key factors, including its goals, financial position, and long-term strategy. This phase typically involves consulting with stakeholders, including management and employees, and may include engaging legal and financial advisors. This review ensures the scheme aligns with the company's objectives and complies with relevant legal and regulatory requirements, providing a strong foundation for successful implementation.
Once these analyses are complete, the company can move forward with designing the share scheme. At this stage, the company will decide on key aspects, such as the number of shares to allocate, whether a new class of shares is needed, and the conditions, rights, or restrictions attached to those shares or options. It is typically necessary to have informal discussions and obtain preliminary approval from the company's shareholders to ensure alignment before drafting formal documentation. This approach helps to prevent any issues in the later stages of the process.
Documenting Employee Share Schemes
The specific documents required will vary depending on the scheme's structure, but will generally include the following:
Articles of Association. In compliance with the laws of the Kingdom of Bahrain, the company's Articles of Association must explicitly allow for employee share schemes and provide details regarding their operation. Should the scheme require the creation of new share classes, the Articles will need to be amended to accommodate the allocation and administration of those shares.
Employee Share Option Plan. This document outlines the specific terms and conditions under which employee share options will be granted and exercised. It defines the eligibility criteria for participants, including the required length of service or performance benchmarks that must be met. The plan also details the exercise price of the options, the vesting schedule, and the period during which the options can be exercised. It will specify any restrictions on the transferability of options, as well as the consequences in cases of employee departure, such as resignation, termination, or retirement. Additionally, the plan may include provisions for the adjustment of option terms in the event of corporate actions like mergers, acquisitions, or stock splits. Clear documentation is essential to ensure transparency, minimise potential disputes, and provide employees with a thorough understanding of how and when they can exercise their options, as well as any potential risks or limitations associated with the plan.
Internal Policy Documents. These documents generally encompass remuneration policies and procedures that outline the specific criteria and processes for allocating shares to employees. They ensure that the share scheme is administered in a transparent, fair, and consistent manner, providing clear guidelines on eligibility, allocation methods, and the conditions under which shares are awarded. These policies may also detail how performance metrics or tenure requirements impact the allocation of shares, as well as any restrictions or vesting schedules that apply. By establishing clear and uniform standards, these documents help to foster trust among employees and ensure compliance with both internal objectives and regulatory requirements. Furthermore, they serve as a reference point for managers and HR teams to ensure the proper administration of the scheme, promoting fairness and reducing the potential for disputes or misunderstandings.
Internal Communications. It is essential to develop clear and comprehensive communication materials to inform employees about the details of the share scheme. These materials should explain the scheme's objectives, the benefits available to participants, and the specific mechanics of how it will operate. Effective communication should cover key aspects such as eligibility requirements, the process for receiving and exercising options or shares, vesting schedules, and any restrictions or conditions that apply. Additionally, ongoing communication should be maintained to address any questions, clarify changes, and reinforce the scheme's alignment with the company's broader goals. This transparent approach fosters employee engagement, boosts morale, and ensures the scheme's successful implementation and ongoing participation.
Template Records. Standardised record-keeping templates must be created to track all transactions and activities related to the employee share scheme. These records should include detailed information such as the allocation of shares or options to employees, the exercise of options, vesting schedules, and any changes in the status of shares or options (e.g., transfers or forfeitures). Templates should also capture critical data such as employee identification, grant dates, exercise prices, and the number of shares granted or exercised. These records serve as an important tool for ensuring accurate, consistent, and compliant administration of the scheme. They also provide an audit trail, which is essential for regulatory compliance, reporting purposes, and resolving any potential disputes. Properly maintained records facilitate transparent and efficient management of the scheme and enable the company to monitor and evaluate its effectiveness over time.
Implementing Employee Share Schemes
The specific documents required will vary depending on the scheme's structure, but will generally include the following:
Shareholder Approval. Before moving forward with the implementation of an employee share scheme, it is imperative that the company secures formal approval from its shareholders for both the scheme's overall design and the associated documentation. This approval ensures that the shareholders agree with the terms and structure of the scheme, as well as its alignment with the company's long-term strategy and interests. Furthermore, if the scheme involves the issuance of new shares—whether through the exercise of share options or the direct awarding of shares—shareholder consent is required for the creation and allocation of these shares. This consent is typically subject to a predetermined limit, ensuring that the issuance remains within acceptable parameters and does not unduly dilute existing shareholders' equity. In situations where a bulk issuance of shares is planned, such as the creation of a pool of shares held within an employee benefit trust for future allocation, shareholders must also provide approval for the issuance of those shares. This step is essential to maintain transparency, safeguard shareholder interests, and ensure compliance with corporate governance standards throughout the implementation process.
Communication of Employee Share Schemes. After obtaining the shareholders' approval for the employee share scheme, the company must engage with key stakeholders, particularly those who play a role in decision-making regarding employee remuneration, such as senior management, line managers, and remuneration committees. This phase is crucial for ensuring that all involved parties fully understand the scheme's structure, objectives, and operational details. The company should provide in-depth briefings on how the scheme will be administered, including eligibility criteria, the allocation process, vesting schedules, and any conditions attached to the shares or options. It is vital to ensure that managers and decision-makers are well-equipped with the necessary information to answer any questions, clarify doubts, and guide employees through the process. By fostering a clear and comprehensive understanding among these stakeholders, the company can ensure consistent and accurate implementation of the scheme, as well as maintain transparency and confidence throughout the organization. This collaborative approach helps align the interests of both the company and its employees, while enabling smooth execution and greater participation in the scheme.
An essential component of successfully implementing an employee share scheme is ensuring clear and effective communication with all employees. This process involves the creation and distribution of detailed, easy-to-understand materials that outline the objectives of the scheme, its operational mechanics, and the specific benefits employees can gain from participating. These communications should address key aspects such as eligibility criteria, the allocation process, vesting schedules, and any conditions or restrictions attached to the shares or options.
Issuance of Scheme Options/Shares. After the employee share scheme has been successfully implemented, the next step is to award the options or shares to eligible employees in accordance with the terms and conditions established in the scheme. This involves determining which employees qualify for the awards based on criteria such as tenure, performance, or role within the company. The company will then formally issue the shares or options, ensuring that all necessary documentation is completed and that each recipient is informed of their allocation. The issuance process must be carried out in a timely and accurate manner to ensure compliance with the scheme's provisions and to provide employees with a clear understanding of their entitlements, including any associated vesting periods or restrictions. Proper record-keeping is essential during this stage to maintain transparency, ensure regulatory compliance, and facilitate future administration of the scheme.
Record Keeping and Share Register Updates. Effective ongoing administration of the employee share scheme requires the meticulous maintenance of accurate records and regular updates to the company's share register. This includes tracking the allocation of shares or options, any exercises or transfers, and changes in the status of employees who participate in the scheme. It is essential that these records are kept up to date to ensure compliance with regulatory requirements and to provide transparency for both the company and its employees. Companies can choose to manage this process internally, leveraging their own resources and systems, or they may opt to engage third-party service providers with expertise in share scheme administration. Outsourcing to specialists can help ensure greater accuracy and efficiency, particularly in handling complex tasks such as share valuations and compliance with legal obligations. Regardless of the approach taken, robust record-keeping is critical to the smooth operation of the scheme and the protection of both the company and its stakeholders.
Periodic Review. As a company progresses and its circumstances change, the initial rationale behind implementing a specific employee share scheme may no longer align with its current needs. Therefore, it is advisable for companies to conduct regular reviews of the scheme to ensure it remains relevant and continues to effectively support the company's evolving objectives. This review process should involve a thorough assessment of the scheme's design and its impact on employee engagement, retention, and motivation. It should also evaluate how well the scheme aligns with the company's current growth trajectory, strategic goals, and market conditions. Through periodic evaluations, the company can identify areas for improvement, make necessary adjustments, and ensure that the share scheme continues to be a valuable tool in driving long-term success and employee satisfaction.
Legal Framework for Employee Share Schemes
In the Kingdom of Bahrain, the regulation of employee share schemes for joint stock companies is governed by two distinct legal frameworks. The applicable framework depends on whether the company in question is a closed entity, publicly listed, or licensed by the Central Bank of Bahrain (the CBB).
Employee share schemes for listed companies or CBB licensees are subject to the regulations set out in the CBB Rulebook. The CBB has mandated that all licensed banks implement a share scheme for employees, with a particular focus on high-earning individuals or senior management.
On the other hand, closed joint stock companies fall under a separate regulatory framework established by Decree-Law 21/2001 issuing the Commercial Companies Law (the CCL) and Resolution 119/2021 of the Minister of Industry and Commerce concerning the Regulation of Employee Share Ownership in Closed Joint Stock Companies not Listed on the Stock Exchange.
Concluding Remarks
Employee share schemes offer a strategic approach for companies to foster a sense of ownership and responsibility among their workforce, aligning employee interests with organizational goals while driving performance, loyalty, and long-term business success. These schemes, whether in the form of share options, bonus awards, growth shares, or phantom options, provide tangible financial incentives that can significantly enhance employee engagement, motivation and retention. By giving employees a direct stake in the company's growth, these schemes not only encourage long-term commitment but also create a more invested workforce focused on the overall success of the business.
However, the successful implementation of such schemes requires meticulous planning and attention to detail, from designing the scheme structure to securing the necessary legal approvals and maintaining transparent communication with all stakeholders. Clear and consistent communication is critical to ensuring that employees understand the benefits, conditions, and mechanics of their participation. For private companies, in particular, the added complexities surrounding share valuations, buyback provisions, and governance must be managed with care to avoid potential pitfalls and ensure the scheme's effectiveness.
As companies evolve, periodic reviews and adjustments of these schemes are essential to adapt to changing business needs, growth trajectories, and market conditions. This ongoing evaluation ensures that the scheme remains relevant and continues to meet both organizational and employee objectives. By adhering to relevant legal frameworks, industry standards, and best practices in scheme administration, companies can maximize the benefits of employee share schemes. In doing so, they can fully harness the potential of their workforce, creating a strong culture of ownership and collaboration that drives long-term success and sustainable growth.
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