Share-based / Stock incentive plan is a scheme that provides employees with an incentive to act in the shareholders’ interests by tying their remuneration directly with the company’s share performance.
The benefits of a share-based / Stock incentive plan
The major advantage of share-based compensation is the financial considerations both for the employer and the employee. It allows employers to offer their employees more – which is great for the employees – while not affecting their bottom line – which is great for the employer. More benefits:
- Helps attract and retain talent: It is particularly useful for smaller companies that are just starting out, allowing them to offer employees a portion of their potential when they don’t have much cash to hand. So, they can remain on solid financial ground.
- Attains greater alignment: Employers benefit from the alignment of their employees’ values with the company’s missions.
- Achieves lower absenteeism: Employees work harder and are more productive as their performance impact how much they can earn.
- Builds employee engagement: Employees likely generate a feeling of team spirit – they’re not just employees, they’re employee-owners and can often make valuable contributions to the company’s direction through shareholder voting.
- Enjoys tax benefits
- Help cash-flow management: A share-based incentive plan reduces the amount paid out in cash, especially ideal for companies with limited cash flow.
Types of Stock Compensation
Besides offering stock immediately to employees, here’re the two common types of stock incentive plans in Italy:
- Stock Options – An incentive offering employees a chance to purchase company shares in the future at a preset price
- Restricted Stock – An incentive released to employees once all conditions are met
How does equity compensation work?
1. Stock options:
A stock option is a popular equity compensation form. It provides employees with the right, but not the obligation, to purchase company shares at an initially agreed price (i.e. exercise price) after a vesting period. Vesting is a process of earning full ownership of your award. You can sell your shares right after vesting or hold onto your shares.
Pros & Cons:
Pros: Employees can benefit from the increase in value of the company. The vesting schedule can be customized flexibly.
Cons: The share value drops below the exercise price.
Tax in Italy:
The Employment Income derived from the exercise of stock options (the difference between the ‘normal value’ of the shares at exercise date and the exercise price paid by the employee) will be considered as taxable employment income and subject to ordinary progressive income tax rates. However, this income is generally exempt from social security contributions.
Employees will be taxed on the sale of shares. The gain is calculated as the market value on disposal less the market value of the shares on the exercise date.
2. Restricted stock (e.g. RSUs):
Restricted stock is a type of equity compensation with less risk. He/she earns the shares after vesting requirements are met. Typically, participants receive the grants for free under RSU plans.
Pros & Cons:
Pros: As employees don’t need to pay for RSUs, they carry less risk and will always have value as long as the company stock price stay above $0. Like options, their vesting schedule is flexible.
Cons: Employees can’t control the timing of taxation with RSUs as income tax is due once they vest.
Tax in Italy:
The taxable amount is the difference between the market value of the shares at vesting and the price the participant paid on award (if any). Employees will be taxed on the sale of shares. The gain is calculated as the market value on disposal less the market value of the shares on the taxable event date.
How many shares to give employees?
Startups typically create a stock plan that comprises 10–20% of the total equity of the company (50% for the founder(s) and 30-40% for investors). It’s similar to what David Steinberg – the founder of Zeta International, a strategic marketing company – recommended to us:
Steinberg recommends establishing a pool of about 10% for early key hires and 10% for future employees.
Equity Plan Sizes by Industry
Potential problems with a stock incentive plan
Although giving shares to employees is popular in different industries, the main disadvantage that we usually hear about is the matter of complexity.
- A stock plan brings with it a lot of reporting and regulations to follow, as well as entire areas of jurisdiction and tax laws.
- There is also a tremendous amount of work and thought that needs to be put into the design of the plan, e.g. how much equity to give away, participant eligibility, vesting schedule, period of the plan.
- It may also cause extra equity plan administration workload to your existing departments – everything from tracking and reporting changes in ownership to updating documents/policies/procedures, communicating with stakeholders, consulting your board of directors, and staying compliant.
Luckily, there’s an incredibly easy fix to this: Global Shares – Automated cloud-based stock plan management software.
Looking to launch a stock incentive plan? Contact Global Shares today
With Global Shares’ award-winning combination of software and support, we take on all of the complexity and the hard work of management required for your stock incentive plan.
Our teams of experts will take you through Implementation, where we work with you to design and launch your plan, as well as the day-to-day business of maintaining and improving your plan after launch.
Our dynamic, customizable equity compensation software makes it easy for participants to view and manage their equity, but just in case, our multi-lingual Support Desk is always ready to answer any questions.
Contact Global Shares for a free demo today.