Spanish Pension Plans vs Spanish Stock Plans
There is never a bad time to embrace the employee ownership model, but arising from recent and ongoing changes in how pensions are treated in Spain, this may be the ideal moment for companies that have employees in Spain to initiate and promote stock plans among workers.
Pension plans are no longer as beneficial
With reforms brought in under the Spanish General State Budget Law for 2021 and 2022 having significantly reduced the tax deduction benefits on offer for personal pension plans – the ceiling was reduced from €8,000 to €2,000 last year and dropped to €1,500 this year – it follows that individuals will be more open to looking at alternative approaches to securing their financial future or merely topping up their income, which means that the time is right to look at introducing employee stock plans that can serve the needs of both companies and workers.
Why employee stock plans?
Companies choose to introduce employee stock plans for many reasons, but typically the key objectives relate to encouraging retention of staff and facilitating improved individual day-to-day performance on the job. The challenge for companies is to identify share plans that meet their needs but which will also prove attractive to employees. In other words, it needs to be a win-win proposition – a company will only introduce a scheme that they believe will help it to achieve its goals, but that plan also needs to speak to the needs of employees, otherwise it will not generate the necessary interest internally.
Particularly when viewed against the backdrop of the ongoing pension reforms here, which affect huge numbers of people, this may be the ideal time to look to introduce a scheme that is designed to include all employees, as opposed to, for example, just targeting senior executives.
Flexible Remuneration Plan In Stock
Plan Eligibility and Benefits
With that in mind, a flexible remuneration plan in shares may represent the best way forward, for public companies and also some private companies. More on private companies a little later, but for now let’s focus on how a this plan plays out in a publicly traded entity.
This kind of scheme is specifically designed for all employees, and is, therefore, not discretionary, as in, you don’t get to pick and choose who you want to participate. So, anyone working for a Spanish subsidiary of a parent company looking to introduce this shares-based incentive must be invited to take part.
To put it as simply as possible, under the terms of the scheme, employees buy and/or receive stock in the company, and benefit from favorable tax treatment down the line when selling that stock, assuming all relevant rules and conditions have been followed.
In the first instance, participants are given the option to purchase stock in the company from their gross salary, as opposed to net salary, which allows them to save on income tax and social security. Depending upon the salary of the individual, the saving will be in the range of 20-30%. Whatever stock is purchased under the scheme must be held for at least three years, and as long as this key condition is met, no income taxes are levied on the shares when they are sold.
One of the key attractions of the scheme is the generous limits attached to it. In any calendar year, employees can use their gross salary to purchase stock up to a value of €12,000. This represents one of the largest tax incentives of its kind available anywhere, dwarfing the figures associated with similar schemes in, for example, Germany, Italy or the United Kingdom.
So, clearly, at a time when tax benefits on pensions have gone down and continue to decline, stock plans such as this one, once the advantages are properly explained, will become more attractive to individuals.
Even though the terms of the scheme as it operates in Spain allow participants to purchase more stock than counterparts elsewhere, there are no negative implications for companies around dilution of prior shareholdings. No new stock is issued at this point in the process. Instead, all transactions take place on the open stock market – in a Spanish Stock Exchange or any other Stock Exchange worldwide – and therefore only involve stock already in circulation.
However, companies can also choose to issue new stock as part of the scheme. When looking to encourage employees to become participants, additional incentives can be offered, such as matching stock, discounts, and add-ons. So, in addition to being able to purchase stock up to the value of €12,000 on the open market, it is possible for participants to receive additional new stock from the company.
Plan Rules: What you need to know
With regard to the rules associated with the scheme, aside from it needing to be offered on an all-employee basis and the stock needing to be held for at least three years so as to qualify for the tax breaks, no employee, including their direct family, can hold more than 5% of the stock of the company. With regard to private companies, all the above applies, so this plan would be a good fit for private companies who are working towards an Initial Public Offering or expect an exit in the short to mid-term.
Whether you are a private or public company, there are several advantages associated with this scheme.
- It encourages retention. Employees need to remain with the company for at least three years after signing up, so as to maximize their tax benefits.
- Scheme participants have a vested interest in seeing the company prosper. This, in turn, will be linked with greater motivation and improved day-to-day performance in the workplace.
- As the plan needs to be offered to all employees, it promotes a culture of financially inclusivity and equality.
Get in touch today to learn more
The upsides associated with this kind of stock plan are clear and the timing has never been better to introduce such a scheme in your company. Global Shares can guide you through every step of the process.