December 3, 2019
Employees share based compensation (ESBC) has been described as one of the most novel innovations in the corporate business world and finance. First, because it creates a win-win situation between the employer and employees by aligning the interest of both parties towards increasing the net worth of the company. Secondly, it creates a cash free source of remuneration for employers. Thus, employers (especially start-ups and early growth companies) are able to channel scarce cash to other areas of business requiring urgent attention while still benefitting from the impact of a motivated work force.
ESBC is a form of employee remuneration that generally involves the grant of shares or stock options to the employees at a concessional price or a future cash payment based on the increase in the price of the shares from a specified level in return for their service as employees of the company. Such payments are known with a variety of names including employees stock option plans, stock acquisition plans among others.
Typically, ESBCs are granted to employees as part of their remuneration package, in addition to a cash salary and other employment benefits and it is usually conditional on the employee remaining in the employment of the company for a specified period of time. Additionally, there may be performance conditions that must be satisfied by the employee before being entitled to the shares. Such performance condition may include achieving a specified growth in profit or a specified increase in the share price of the enterprise. The date in which the ESBC is communicated to (and agreed by the employee) is the grant date while the waiting period for the fulfilment of the conditions attached to the scheme is known as the vesting period. When an employee becomes entitled to the shares, such shares are said to have vested.
While there are several issues to consider by a company planning the setup of an Employee Share Base Compensation, two important areas of consideration are the assessment of the financial reporting requirements and tax implications of such option to the company. This article explores the financial reporting requirements for this type of compensation scheme as well as the tax issues surrounding its implementation.
ESBCs are generally categorized into three, though there are several modifications of these three in practice. The three categories are Employees Stock Option Plans (ESOPs), Employees Stock Purchase Plan (ESPPs) and Stock Appreciation Rights (SARs). ESOPs are plans under which a Company grants options (a right to purchase) for a specified period to its employees to purchase its shares at a fixed or determinable price. The Option is granted to employees at the beginning of the scheme over a period of time after which they become entitled to exercise their right. ESPPs, on the other hand, are plans under which the enterprise grants rights to its employees to purchase its shares at a stated price at the time of public issue or otherwise. SARs are a form of employee share-based payments whereby the employees become entitled to a future cash payment or shares based on the increase in the price of the shares from a specified level over a specified period.
Employee Share Base Compensation is currently a common feature in the compensation of senior level and long serving employees of companies in Nigeria especially in financial services, manufacturing and financial technology sectors. Some of these companies operate pure ESOPs while others have modified ESPP and SAR.