02 Oct, 2019

Staff Retention Share Options

The use of staff share options can be complicated so requires some consideration, explains Robert Johnson, ifac’s Senior Tax Consultant

Whilst having limited applicability the availability of staff retention share option schemes is something that cannot be overlooked. It is clear these schemes have many shortcomings and that changes are required. Business groups need to bring this to the attention of the relevant Government departments. Unless we move to more user-friendly share schemes the retention of valuable talent could become a bigger and costlier issue for the SME sector.

Restricted Share options

Otherwise known as ‘share clogs’. Effectively these are share options which have a certain vesting period written into the option in which the sale of the shares is restricted. Where the restricted period is 1 year there will be a 10% reduction in the tax payable on the issue of the share options. A 2-year restriction will give a 20% reduction in tax and so on until year 6. The maximum tax relief is 60% where there is a 6-year restriction on sale. This can be an effective tool, especially when a clause is written in which voids the share option if the employee leaves the business in the vesting period. This relief can be targeted at specific persons at any level of the business.

Approved Profit sharing scheme

Up to €12,700 worth of shares can be issued tax-free (but not USC or PRSI free) by an employer to an employee. In order for the relief to apply the shares must be held and retained by a trust for 3 years. This scheme must be open to all employees and cannot target any particular employees. Due to the costs of creating and operating a trust for the scheme and the fact that it cannot be targeted at individual employees but must be open to all employees, the effectiveness of this incentive is limited.

KEEP Scheme

The KEEP scheme is a particular type of share option scheme which can be used to target key employees of a business. It will exempt from income tax any shares purchased by employees under qualifying share options. The conditions can be somewhat restrictive, albeit these conditions were eased in the last Budget. Similar to the other reliefs above the costs involved in setting up such a scheme can be prohibitive due to the need to value the business and shares being issued.

The Challenge

A fundamental issue of all the above reliefs and the effectiveness of any share-based awards for SMEs is the challenge of when the value of the shares being issued can be realised. While a 5% shareholding in a business may have a value for tax purposes, if this shareholding cannot be sold or the value is never realised then is it worth it to your employee? Share-based remuneration which cannot be cashed in will not be an effective means of staff retention if the value can never be realised by that staff. You should review whether buy-back clauses after certain time periods or once certain targets are met, should be written into the share scheme to add effectiveness.

For further information please contact:

David Leydon, Head of Food & AgriBusiness


087 990 8227