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Mary, her cash bonus, and an APSS scheme

mary-cash-bonus-apss-scheme

I want to tell you a story about a woman named Mary, her annual cash bonus, and something called APSS.

 

The tale of two Marys

Mary (a hypothetical employee) works for Pomegranate (a hypothetical, Irish company). Mary Is a hard worker, an innovator and a long-time employee, so at the end of the year, she receives a €3,000 cash bonus. Mary is excited, of course – that’s a lot of money, especially with Christmas coming up. And more than the money, Mary appreciates what the money represents – her company’s appreciation of her service.

When her end of the year paycheck comes, though, Mary is less excited. 40% less excited. Underneath her bonus is listed the following:

  • Cash Bonus: €3,000
  • Income Tax @ 40%: -€1,200
  • PRSI and USC: -€360
  • Net Cash Received: €1,440

Mary is still up €1,440, but she receives less than half of her bonus – and feels more than half deflated. In fact, the bonus that is meant to boost her morale starts to do the opposite – why had her company bothered to give her so much, if in such a way that most of it never reached her?

Pomegranate is out of pocket €3,000, Mary is left with less than half of what she deserves, and nobody is feeling particularly incentivised. Surely, there must be a better way to do this?

Luckily for Mary and Pomegranate, there is. Let’s try that again with something called APSS. (I’ll explain how APSS works after – for now, just assume it’s magic.)

Just like before, Mary receives her bonus of €3,000. Instead of cash, however, Mary uses the magic of APSS to turn her cash into Pomegranate shares, which are then held for three years and sold for a profit.

After three years, Mary’s end of the year paycheck looks something like this:

  • Bonus + Sales Proceeds: €4,500
  • Capital Gains Tax: -€76
  • PRSI and USC: -€360
  • Net Cash Received: €4,064

Instead of paying a 40% income tax of €1,200, Mary only pays €76 of Capital Gains Tax. Combined with the profit she makes from selling the shares, Mary comes out with over €1,000 more than what she started with. And – after-tax.

Clearly, APSS is a great investment method. But it’s not magic. In fact, it’s Revenue approved.

Here’s how it works.

 

The basics

In Ireland, there are two types of employee ownership schemes approved by Revenue – one of which is called the Approved Profit Sharing Scheme, or APSS. Currently, there are over 500 APSS schemes approved in Ireland. From Mary’s story above, you can see why employees are eager to join. But what about the employer – what benefits does a company receive from an APSS? Well, to understand that, you need to understand the basics of the scheme first.

An APSS scheme allows a company to distribute shares, up to a total value of €12,700 per employee per year, to its employees. Like most employee ownership schemes, all participants must participate on similar terms, but there can be a minimum service requirement.

To break down the scheme into its simplest terms:

  1. When an employee receives their bonus, they convert the cash into shares.
  2. After three years, and when the share price is high, they sell the shares for more money than they paid.
  3. They receive the initial bonus and the sales proceeds – with no income tax.

That’s it. It’s very straightforward. And now, the part you’ve been waiting for. The benefits for the employer.

 

Employer benefits

Not only do you save 10.85% employer PRSI, but you retain flexibility in how and when you offer awards. Companies have discretion each year whether to make awards or not. Not only that, but they can still use performance-based bonus plans.

And, like all employee ownership schemes, an APSS scheme ensures that all of your employees think and act like owners – with all the benefits that come from this mindset. Retention and recruitment are much stronger, absenteeism decreases while morale and satisfaction increase and every employee is driving towards the same goal as management.

Besides, Mary’s experience above is a benefit for her employer, Pomegranate. Pomegranate didn’t need to put down €3,000 cash, Mary had an incentive to stay at the company for longer, and Mary received a benefit that makes her very happy.

So, what are you waiting for? Start transforming your workplace, and the workplace of your employees like Mary. Contact Global Shares to see how we can use our award-winning equity compensation software and support to help you launch your own APSS scheme today.

 

To read more about Irish share plans and how we can help you further, please click here.

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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