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INCENTIVES FOR EMPLOYEES WITHOUT CASH (4 mins read)

With rising inflation, higher costs and increase in competition, it becomes harder and more challenging for businesses and companies to attract and retain talent. In addition, losing a key employee can take months to replace and that one employee can take months to get up to full speed.


Whether you are a start-up or a growing company, retaining talented employees are essential to survive and thrive in this market. However, good employees come with a cost.


This article explores plans to retain and reward your employees by using equity in the

company as part-payment of an employee's salary.

Equity incentives

Such plans may take the form of an employee share award scheme (ESAS) or an employee share option scheme (ESOS). Although similar in nature, there are differences in how and when shares are granted to employees under these plans.


Employee Share Award Scheme (ESAS)

ESAS is usually given to directors or upper-level management of a company to reward them when they fulfil certain performance criteria set by the company.


How it works


In an ESAS, the company awards employees with actual shares in the company upon occurrence of certain events. These could include the reaching of certain prescribed milestones (i.e., length of service), or upon meeting certain key performance indicators.


Diagram for purpose of illustration


Employee Share Option Scheme (ESOS)

Share options under the ESOS are most commonly granted to employees, key executives and management of the company.


How it works


An employee is granted a right to buy shares in the company at future date and at a pre-determined valuation. This option to purchase will usually be for a heavily discounted price.


Diagram for purpose of illustration

An ESOS may be structured with a Cliff and/or Vest period, as seen in the example below:

In this example, the company grants 3,000 share options to the employee on 1 January 2021. This is subject to a “Cliff” period of 1 year and a “Vest” period of 3 years.


This means that the employee has been granted the right to these options but any share options will only be vested after the Cliff period of 1 year. If the employee leaves during the Cliff period, he will not be vested with any share options and will lose any right to them.


The Vest period of 3 years refers to the period in which the employee is “vested” with the right to exercise the share options. The employee may only exercise the share options (i.e., purchase the shares) which he or she is vested with.


The share options are not necessarily exercised on the date that they are vested. The company may choose to set a deadline for when these share options may be exercised.

The company may also choose to include a restriction on the sale of any shares obtained from exercising the share options. The right to sell these shares may be subject to a pre-determined time period, or upon the occurrence of certain events.


Pros and Cons of ESAS and ESOS


Both ESAS and ESOS have their pros and cons.


Pros:

  • The ability to reduce salary expenses by part-paying salary with shares and/or share options.

  • The ability to attract and retain staff by paying a competitive compensation using shares and/or share options to make up for a lower base salary.

  • Alignment of interest between employee and company. Having a stake in the company helps to align interests and can motivate employees to work harder as the success of the company directly benefits them.

  • Added incentive to stay – employees have an incentive to stay till shares and/or share options are granted.

Cons:

  • As a new company, there may be difficulty to convince employees that the shares are of any worth and that the share prices will increase.

  • Loss of motivation and morale in the event that share prices fall.

  • The issuance of new shares for use in ESAS and ESOS will dilute existing shareholdings.

  • There may not be a market for the shares, especially for private companies. This can make it an unattractive method of compensation to employees as they cannot realise the value of the shares.


Considerations when structuring an ESAS or ESOS

In implementing and structuring an ESAS and ESOS, certain considerations should be taken into account. Such considerations include the market rate of the employee’s monthly salary, the monthly cash salary that the company can afford to pay the employee, the number of shares to be set aside for ESAS and ESOS, the number of share options to be granted in an ESOS, the value of the share option and the potential dilution of founder and/or shareholder control that may occur as a result of an ESAS and ESOS.


Conclusion

The use of ESAS and ESOS can be very powerful tools for companies, especially those that may be new and with limited capital. Such plans will help to align the interests of employees with the interests of the company, and can create a strong incentive for longer-term commitment.


As seen above, there is also no one-size-fits-all structure. One will need to consider the finances, needs and objectives of a company when structuring such a plan.


Besides ESAS and ESOS, there are other ways to incentivise your employees. If you like to explore other ways to reward and retain talents without straining your company resources, please feel free to contact us for a discussion.


Prepared by Avant Law LLC

Avant Law LLC is a law firm in Singapore specialized in capital markets and mergers & acquisitions. Our corporate lawyers in Singapore are dual qualified in both Singapore laws and Malaysia laws.


For more information, please visit us at https://www.avantlawllc.com/


Disclaimer


This guide is solely for informational purposes only. It is not intended to be or nor should it be regarded as or relied upon as legal advice. Please do not act or refrain from acting based on anything you read on this guide. Avant Law LLC does not accept and fully disclaim responsibility for any loss or damage which may result from accessing or relying on this guide.



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