Employee Stock Option Plan (ESOP) Schemes in Singapore

Employee Stock Option Plan (ESOP) Schemes in Singapore

Whether you are a start-up or an established company, you will want to attract and retain the best of your employees. You will also need to motivate your human resources so that you stay one step ahead of your competitors. You can achieve this by added incentives. The Employee Stock Option Plan (ESOP) is one of the best incentives that you may offer your employees.

What Exactly is ESOP?

ESOP enables employees to purchase the shares of their own company at a pre-determined price over a course of time. The rules of the ESOP and the exercise price will be set by the company’s board of management who will ensure that the price set is close to the market value of the share.

How Does ESOP Work?

When a company grants ESOP to its employees, it enables them the right to purchase a certain amount of shares. However, this purchase is subject to certain conditions. For instance, the company may require the employee to work for a certain time before he/she can exercise their options and purchase the stocks. You may adopt one of the following plans or variations of these to suit your company:

  • Incentive Stock Option (ISO)
  • Employee Stock Option Scheme (ESOS)
  • Employee Stock Purchase (ESP)
  • Stock Appreciation Rights (SARs)
  • Restricted Stock Unit (RSU)
  • Restricted Stock Award (RSA)

3 Factors to Consider Before Implementing ESOP

ESOP terms differ from one company to the other. Though you may have your own set of criteria, these are the factors to consider while implementing ESOP.

Objective of ESOP

If you want the ESOP to be an incentive for your employees, you may go for a low excise price. Thus, your employees can have an upside when they sell their holding. In case, you seek your ESOP to be a talent retention tool, you can have a longer vesting period. 

Eligibility of Employees

Though you may have your eligibility criteria for your employees, you will have to make sure that the employee is neither a promoter no belongs to the group of promoters. Secondly, the employee should not be a director who either by himself or through a proxy holds more than 10% of the outstanding equity shares of the company.

The Equity Percentage for ESOP

There are no set rules on the amount allocated for ESOP. However, we suggest that you establish a limit on the amount of equity to be shared with your employees.

Dilute Equity Shareholding

With the implementation of ESOP, ownership is likely to be distributed amongst a lot of shareholders. This could create a problem for the employer as he/she might be left owning a very small part of the company. In such a case, a clause for drag-along rights may be added. This clause will let the majority of shareholders have an upper hand in the case of a company sale or a merger. They will be in a position to get the minority shareholders to sell their shares in case of a third-party offer.

Resignation of Employees after Vesting

Your ESOP agreement should make way for a clause that would specify what would happen if an employee resigns after his/her shares have been vested. Usually, the employee has to forfeit the unvested option while they still retain the vested option for a specified period when he/she leaves the company.

Complicated Process

Setting up an ESOP will involve a lot of scenarios, with many rules and regulations in each scenario. Though ESOP is flexible, the procedure is complex and would involve the presence of an experienced lawyer. Our lawyers at Jaanik will make each complicated procedure easy for you and enable you to choose the right plan of ESOP.

Benefits of ESOP

As the company offers its shares to the employees, it will inculcate a sense of belonging in the employee, thus motivating him/her to commit for the long term. This encouragement will propel the employee to work effectively, cultivate loyalty and contribute positively to the growth of the company. In addition to this, the company and the employees can derive more advantages from the ESOP.

Attract Talent with Remuneration Packages

When employees get to buy shares in their company, they feel that they have a stake in their company. This increases their loyalty and will also help the company stand out from its competitors. If you have a limited cash flow and are unable to pay the full market salary to your employee, you may use ESOP to supplement their salary with share options.

Build the Company’s Image

Companies that have adapted ESOP are productive, profitable and have a lower turnover. By acquiring shares in the company, employees develop a sense of ownership. They tend to align their career growth with the growth of the company. This impels them to work more effectively, thus contributing to the company’s success in the long term.

Corporate Financing Tool for an Employer

As a company, you may make use of ESOP to buy new equity, acquire assets or refinance outstanding debts. Thus, you will be able to achieve your corporate goals and objectives. 

Retirement Assets and Tax Benefits

A person employed with the company for a significant period can incur retirement benefits from the ESOP. Also, employees do not have to pay tax on the amount paid by the employer to the ESOP or the income they earn on their account until they receive distributions.

Tax Implications of ESOP

Is ESOP taxable? Yes, they are. As per the Singapore law, employees physically present in Singapore will have to pay tax on any benefits they derive from ESOP. For more details on these and how these taxes will impact the position of your company, we recommend that you contact our tax professionals.

Although there are many lawyers to help you get around with the Employee Stock Option Plan, our professionals in Jaanik are the most resourceful when it comes to helping you derive the best benefits of ESOP as per the needs of your company