You don’t have to spend a lot of money on expensive tools and programmes to encourage your team to perform more efficiently and better. Forget about emptying your company’s wallet by granting bonuses or raising pay. Nowadays, there are other options available that are more beneficial for the employer as well as the employee. One such tool is stock options.

Grant stock options

The principle is quite simple: in exchange for dedication and good work, offer your employees to buy a small portion of the company (at a good price). What are the benefits of stock options and how can they help develop your business – this is what we explain below.

What is a stock option?

The question of how to increase the motivation of employees to work has been relevant for decades and even hundreds of years. After all, the performance of a company depends on it. Paying bonuses, organising team events and giving gifts are, of course, good gestures, but they do not always produce the desired result.

For this reason, stock preemption right or stock options are becoming increasingly popular. Sounds complicated? Not at all! Stock options are nowhere near as scary as they might seem at first.

Simply put, stock options are a type of investment that allows an employee to buy a certain number of company shares at a fixed price. This means that employees have the right and choice to buy shares in the company. Why is this a tempting offer? There are several reasons for it.

The biggest advantage is that the employee has the opportunity to purchase stock options in the future at the price on the day the offer is made (the price could be low or even with no charge). This means that later (possibly even after several years), when the value of the company has grown, you will be able to acquire shares at a much better price and thus make a profit.

The biggest advantage of stock options is that the employee has no obligation to exercise them. If you do not want to buy company shares, you need not do it.

What is important to know regarding granting a stock option?

If you’ve never granted (or received) stock options before, you may be confused. Indeed, a number of important aspects need to be taken into account in the process. First of all, it is important to remember that the employee is entitled to start exercising the options no earlier than after 12 months (from the date the options are granted).

The law does not specify what the offered price should be. Each company is free to choose what it will be (even at par value) and there is no need for a formal appraisal.

Importantly, the total par value of the shares may not exceed 10% of the company’s paid-up share capital. Employers do not have to worry about paying taxes because stock options are not taxed (unless one year has elapsed since they were granted and other requirements are observed).

What do employees need to remember?

Although stock options are granted by the employer, it is also important for employees to consider a few aspects. The good news is that the recipient of stock options is free to dispose of the acquired shares. Moreover, the transferee may exercise all the rights of the shareholders, including the right to receive dividends, the right to vote, the right to a liquidation quota.

Employees may also issue non-voting shares. If you are planning to terminate your employment, it is important to remember that you can exercise your stock options within 6 months of leaving. If you have decided to waive your rights, the other shareholders have the preemptive right.

If you have received stock options, it is important to remember to pay taxes. Payroll tax is payable if the options are not held for at least one year. When you decide to sell your shares, do not forget that you need to pay income tax on capital gains – currently it is 20%.

Unless the shares are publicly traded, the company must arrange for an independent appraisal.

When can I avoid paying payroll tax when exercising options?

The law also provides for individual cases where you do not have to pay payroll tax when exercising your stock options. There are several such exceptions. For example, if at least 12 months have elapsed since you acquired them, if there is no debt between the capital company and the employee, if the employer has submitted the SRS the information specified by law and the like.

Here you will find a more detailed explanation of when you won’t need to empty your wallet.

What information must be provided to the SRS?

As with other transactions, the State Revenue Service must be notified of the granting of stock options. To do this, it will be necessary to calculate the income earned, which, to put it simply, is the market value of the shares minus the purchase value of the shares.

How is it determined? If the company is public, the fixed weighted average share price must be taken into account. If the shares are not publicly traded, an independent appraisal must be performed according to a certain methodology. Such an opinion may be prepared by a person included on the list of property investment appraisers. Remember that the appraisal is only valid for 12 months from the date of its preparation.

Employers must also provide the SRS with detailed information on the capital companies involved, the conditions for purchasing shares and much more within two months after the period for applying for options or their granting. You can find more information about what needs to be included here.

What is the difference between staff shares and options?

You may have heard of staff shares – they are essentially similar to stock options, but there are some differences between the two concepts.

Staff shares mean that the company grants shares to its employee. While companies that choose stock options only give the employee the right to acquire them. Generally, staff shares are preferred by larger companies whose value is clearly predictable. In this way, they often reward their employees in senior positions.

Stock options, on the other hand, are a good option for start-ups. When a company is newly established, it is not always possible to offer high pay to its employees, but it is expected that the shares will be much more valuable later on. This is why stock options are a great way of attracting highly qualified professionals and motivating them to work more efficiently.

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