Employee incentive trends – SAR plan’s: your incentive plan for 2024

Anticipating on developments in the labor market is important for businesses and organizations to remain competitive, especially as employee expectations are structurally changing and the competition for talent is intensifying. Rewarding employees is more than just compensation for performance. It is an incentive to increase motivation and engagement. Remuneration should therefore be seen as a strategic tool to attract and retain talented employees, and to position organizations as top employers in a rapidly changing labor market. Equity-based remuneration is particularly well suited to these objectives.

Equity incentives: trends for in 2024

Choosing an equity incentive plan to incentivize your employees could become easier in 2024 due to (contemplated) changes in domestic tax legislation. Complicated employee equity structures will become less tax advantageous – if the Upper House of Parliament will vote in favor of the Tax Plan Package 2024 - due to an increase of tax rates in the Dutch substantial interest regime (from 26,9% up to 33%), meaning that it has become more interesting to provide easily accessible Stock appreciation right (SAR) plans to your employees.

Under a SAR plan, an employee is given the (future) right to receive a cash payment equal to the appreciation of a predetermined number of shares over a certain period. Considering a corporate tax benefit that could be available at the level of the issuing company, SAR plans can be provided to your employees with an effective tax rate of 32%.

For the issuing company, a SAR plan also has advantages. The main benefits of incentifying employees through a SAR plan is that it is easily set-up, does not require statutory adjustments and is relatively tax friendly. In the plan documentation key drivers of the company can be included, meaning that a SAR plan is perfect to align for example the ESG strategy of the company with the interest of the employees.

Our Reward team, consisting of legal and tax experts, can assist you with easily setting up a SAR plan for your company. However, equity incentive plans also come in various other forms. The type of plan that is best for the company depends on several factors. To help you choose the best equity incentive plan, it is important to follow a few steps. We will explain these steps below.

Step 1: determining strategic alignment

The initial phase of an incentive plan development involves a thorough assessment of the company's objectives and aligning them with the intended outcomes of the equity-based plan. It is for instance more important to align the interest of the employee for a long-term period, or does it focus more on retaining the employees until a future IPO or exit? This crucial step ensures that the plan effectively supports the company's strategic goals.

Key considerations:

• Goals of the Equity Plan: clearly define the desired outcomes of the equity plan, such as attracting and retaining top talent, fostering a performance-driven culture, securing financing opportunities, and enhancing employee morale and collective spirit.
• Competitive Benchmarking: evaluate the equity plan against industry standards and competitor offerings to ensure its attractiveness and effectiveness in the market.
• Stakeholder Engagement: discuss the plan key stakeholders to gather their input and ensure alignment on the plan's objectives and design.
• International alignment:  given the international nature of an equity incentive plan, determine whether it is desired for the plan to be rolled out in multiple countries.

By carefully considering these factors, companies can develop an equity plan that aligns with their strategic objectives and contributes to long-term success.

Step 2: type of equity incentive

After the key considerations have been discussed to match the company's objectives, there are various type of equity incentives that could be considered. The type of plan is strongly influenced by the goals of the company. Below we have included the (most common) type of plans that could be considered.

• Employee Stock Ownership plan (ESOP): employees have a (immediate) right to a delivery of shares if the conditions set for it are met; lock-up clauses or other selling limitations are relatively common for ESOPs. Benefit: perfect for long term commitment, clear alignment between shareholders and employees.
• Certificates of shares: the employees receive stock certificates that represent a portion of a share in the company. The voting rights of the share are vested in a foundation for the administration of shares (STAK). This means that the employees do not have the right to vote on matters that are put to a vote by the shareholders, nor any shareholder meeting rights. Benefit: participants do not have meeting or voting rights, but only participate in the economic benefits associated with such shares.
• Stock option plan: the right of employees to acquire a share of the company at a predetermined exercise price. Benefits: good for long-term engagement, clear alignment between shareholders and employees.
• Restricted stock units (RSU): a conditional right to a delivery of shares or certificates without direct acquisition of legal ownership. Benefit: clear alignment between shareholders and employees, flexible conditions can be included in RSU plans.
• Stock appreciation right: a (future) right to receive a cash payment equal to the appreciation of a predetermined number of shares over a certain period of time. Benefit: easily set-up, tax friendly.
• Phantom stock: similar to SARs, this a right to a payment in money if the conditions set for it are met. Generally, dividends or dividend equivalents are paid during the holding period of the phantom stock. Benefit: easily set-up, tax friendly, economically matches ESOP.
• Sweet equity/hurdle share: equity instrument that potentially offers a significantly high return that is (generally) subordinated against other equity incentives. Benefit: strong instrument for incentifying management, great tool for focus on IPO.

Step 3: setting up the equity incentive plan

Based on the company's strategic choices and the chosen equity variant, the legal and tax experts from our KPMG Reward team can develop a concept equity incentive plan and prepare the required documents. If necessary, we can also assist with the application for a tax ruling on, for example, the taxable wage benefit, as well as the other tax considerations of a plan such as the corporate income tax deductibility. The concept version of this plan will then be discussed with the relevant stakeholders. Does the plan, for example, meet the strategic choices and the goal of the company? After answering these questions, we will be able to finalize the plan and the accompanying documents. Given the global reach of the KPMG network, it could then be considered whether the equity incentive plan should be rolled out in other countries.

Contact with a specialist

Are you interested in discussing your thoughts on employee incentives further? If so, please contact your Meijburg adviser or one of our tax advisers from our People Services team. We will be happy to assist you.