Deciding how to incentivize your employees can be a complex process. Deciding how to incentivize your employees in a different and unfamiliar jurisdiction can be harder still. A common approach that companies take is to grant stock options so that employees can gradually own part of the company that they work for and align both the company and shareholders’ interests to a common commercial goal.
One of the reasons that stock options are popular as an incentive tool is their flexibility. A company that operates a stock option plan in the US can, depending on the rules of the plan, extend it to other international jurisdictions so that non-US employees can participate on broadly similar terms as their US colleagues.
This is usually brought about by providing for separate and country-specific stock option agreements, or, if required, creating a sub-plan to the main stock option plan that specifically caters for the grant of stock options in a particular country. Companies will need to ensure that the grant of stock options in a non-US jurisdiction does not violate any local employment, tax and securities laws and legal advice should be obtained in the relevant country to ensure compliance.
Tax considerations are also a major driver of the use of stock options. In the US, Incentive Stock Options (ISOs) are a form of “tax-advantaged” stock option that provides income tax relief if certain criteria are met. Certain other countries offer a form of tax-advantaged stock option plan that attracts tax reliefs provided statutory requirements are met, such as Enterprise Management Incentive (EMI) options in the UK, so it is advisable to seek local advice as to whether any favorable arrangements can apply to your employees.
Whether stock options are tax-advantaged or not, all relevant group companies must ensure at the outset that the stock option documents provide that they are able to withhold any relevant taxes and social security contributions that may arise on grant and/or exercise of a stock option and deal with any other specific local requirements, such as securities laws.