An HR guide to structuring equity compensation arrangements

While equity compensation arrangements are commonly offered to senior leadership positions, what challenges does their implementation present to HR?

An HR guide to structuring equity compensation arrangements
Equity compensation arrangements are an effective way to incentivise staff to work towards long-term business goals without expending additional capital. However, they also come with some risks for employers especially from a legal, tax and accounting standpoint.
Dayne Ho, partner at Shook Lin & Bok, talked with HRD Singapore about what HR can do to structure these types of arrangements in a manner that minimises risks for all parties.
In general, there are two approaches commonly used for equity compensation arrangements, Ho said.
“Under a share option plan, an employee is granted options which tend to vest over a period of time and which can be exercised at a particular strike price when vested. The employee is then free to deal with the shares as he or she deems fit once the relevant options have been exercised.”
“For a share award plan, employees are awarded shares outright, as opposed to being granted an option which needs to be exercised. Such shares are normally awarded at a price that is lower than the market price for such shares.”
Equity compensation arrangements can be tricky to establish or implement over their lifespans, Ho said, with HR professionals facing certain challenges in these areas.
“One commonly overlooked aspect is how such an arrangement can affect an employee’s personal tax obligations. While such arrangements are meant to benefit the employee, they also attract personal income tax liability in Singapore and it can be problematic if an employee has to take pay income tax for shares or options that they have not really benefited from yet.”
Luckily, Singapore allows for deferment of these types of payments if an application is made and is successful, Ho added.
A second challenge is when arrangements are offered to teams of staff which are spread over multiple jurisdictions especially in locations where the offering of shares or securities is a regulated activity.
“We would normally recommend that professional advice is sought before applying an equity compensation arrangement across multiple jurisdictions, just to ensure that no laws or regulations are inadvertently breached,” he said.
Finally, while there is no one method for offering tax effective equity compensation arrangements, Ho detailed several considerations employers should be aware of.
“The tax that is imposed on such equity compensation packages is based on the taxable gain and this in turn depends on factors such as whether there are selling restrictions or moratoriums imposed under the equity compensation package and the actual market price versus the award or option price at the relevant time.”
Related stories:
Singapore chooses: Base salary or performance bonus?
Not all perks are created equal
Budget sees big company HR win out over cash-strapped colleagues

Free newsletter

Our daily newsletter is FREE and keeps you up-to-date with the world of HR. Please complete the form below and click on subscribe for daily newsletters from HRD Asia.

Recent articles & video

Creating conditions in which organisational development thrives

Jack Ma on '996' overtime culture

How to offer a stellar employee recognition program

Hong Kong Airlines faces mass employee exodus

Most Read Articles

Jet Airways pilots grounded due to unpaid salaries

Is your organization making this killer diversity mistake?

'It starts with people and it ends with people'