Month: May 2020

What is an Employee Share Plan? (ESAS vs ESPP)

What is an Employee Stock Option Plan (ESOP)?

What is an Employee Share Plan? (ESAS vs ESPP)

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Based on reports from a survey conducted by Workday and published on Human Resource Directors, Singapore’s job market currently has an expected turnover rate of 46% per annum, the highest across the Asia Pacific. Given this alarming statistic, employment retention is key for companies to grow and maintain a competitive advantage with their best minds running the entity with in-depth, industry-specific skills and experiences. To overcome this issue effectively, we are seeing a surge in companies adopting an Employee Share Plan (ESP). It is essentially a remuneration package where employees are rewarded with the company’s ordinary shares, either by subsidy or free of charge, after certain performance criteria have been fulfilled. Some examples of an Employee Share Plan include Employee Share Award Scheme (ESAS), Employee Stock Purchase Plan (ESPP) and Employee Stock Option Plan (ESOP). As a result, not only are employees retained, but they are also incentivised to work towards the company’s objectives and not on their own.

In this article, we will discuss each in detail to demonstrate the differences between the Employee Share Award Scheme (ESAS) and the Employee Stock Purchase Plan (ESPP).

Employee Share Award Scheme (ESAS)

This plan is usually given to directors or upper-level management, where the employee is rewarded with ordinary shares of the company if they fulfil certain criteria or performance metrics set forth by the company. Initially, the participant (director or senior manager) will be allotted X number of restricted shares. At each vesting period (usually annually), a proportion of the allotted shares will be vested and become unrestricted shares, where the participant can then enjoy the benefits of owning an actual share (i.e. Sell, Voting Right, Dividend Payout). The number of shares to be vested and turned into unrestricted shares will depend on the participant’s performance during their evaluation period.

There are two types of ESAS, namely, a Performance Share Plan (PSP) and a Restricted Share Plan (RSP). They can be summarised as follows:

 

Types of ESASPlan DurationVesting PeriodPerformance MetricParticipantTarget Companies
PSP3-5 YearsEnd of Plan (With Annual Evaluation)

– Total Shareholder Return

– Return on Equity

– Return on Sales

– Market Ranking

– Directors

– Non-Executive Directors

– Senior Manager

– Head of Department

– Listed Companies (Including Mainboard and Catalist)
RSP3 YearsAnnually

– EBITDA

– Economic Value Added

Case Study 1: Restricted Share Plan (RSP)

Jack Li (Employee of Jack Manufacturing Company) recently joined the Jack Manufacturing Company Restricted Share Plan (RSP), where he was allotted 1,000,000 shares on 1st April 2020. The RSP plan spans a 3-year duration with 2 vesting periods. The first vesting date is 2nd April 2022, where 50% of the allotted shares will be vested and become unrestricted shares, based on Mr. Li’s performance from 2nd April 2020 until 1st April 2022. The second vesting date is on 2nd April 2023, where the remaining 50% of the allotted shares will be vested, depending on his performance from 2nd April 2020 till 1st April 2023. His results are summarised as follows:

 

Vesting Period2nd April 20222nd April 2023
Performance Metrics95%100%
Vested450,000500,000
Unvested50,0000
Total Awarded450,000 + 500,00 = 950,000

 

During the first vesting period, Jack only managed to reach 95% of his pre-set target. Therefore, the Remuneration Committee (RC) decided to vest only 450,000 shares of the allotted 500,000 shares for that time period. The remaining 50,000 shares will either be placed back in Jack Manufacturing Company’s treasury account or evaluated again towards the second vesting period. For the purpose of this example, we will assume that the unvested 50,000 shares are being placed back into Jack Manufacturing Company’s treasury account for simplicity.

During the second vesting period, Jack performed well and managed to reach his target, thereby having all 500,000 shares vested accordingly.

In conclusion, Jack has a total of 950,000 Jack Manufacturing Company’s ordinary shares by the end of 2nd April 2023, which he can either sell or keep. If he chooses to keep the shares, he will enjoy voting rights and receive dividend payments as and when due.

Companies that adopt such a plan usually aim to ensure that shorter term (i.e., Annual) goals are being met and satisfied. This is in contrast to PSP, where longer-term goals are the focus. See below for this case study.

Note: As a rule, companies will only allot shares up to 15% of their current outstanding ordinary shares at any time to all their eligible participants to prevent overpowering in any form.

Case Study 2: Performance Share Plan

Sarah Perry (Employee of Jack Manufacturing Company) recently joined the Jack Manufacturing Company Performance Share Plan (PSP), where she was allotted 1,000,000 shares on 1 April 2020. She will be evaluated annually and given a scorecard. The average of all scores spanning across 3 years will determine the final number of ordinary shares awarded. It is worth pointing out that the scores she receives in one particular year will not affect her scores in other years.

Her results are summarised as follows:

 

Evaluation Date (Annually)2nd April 20212nd April 20222nd April 2023
Score Card95%110%65%
Average score across 3 years(95% + 110% + 65%) / 3 = 90%
Total Awarded1,000,000 x 90% = 900,000 Ordinary Shares

 

In conclusion, Sarah will have 900,000 Jack Manufacturing Company’s ordinary shares by the end of 2nd April 2023, which she can either sell or keep.

Note that in some companies, a Claw-back Policy may be introduced. This policy will require the individual to return a certain number (if not all) of the rewarded ordinary shares if the performance achieved is deemed unsustainable for a set number of years after the PSP Plan.

Companies that adopt such plans usually aim to ensure that longer-term goals are materialised, as opposed to RSP, which focuses on shorter-term goals. In addition, such a policy will incentivise the individual to constantly reflect on and improve on the strategies adopted to ensure sustainable performance for the long haul.

Employee Share Purchase Plan (ESPP)

Employee Stock Purchase Plan is offered to all employees of the company. The company will effectively subsidise employees in purchasing ordinary shares of the company.

On a monthly basis, a portion of the participant’s (employee) gross income will be automatically deducted and placed in a separate account (sitting with the company) for a minimum period of one year. By the end of the year, the participant either has the option to use those funds to purchase ordinary shares or have them transferred back to the participant’s own account. To incentivise participants to partake in this scheme, companies would offer an advantageous interest rate for the funds being set aside. Therefore, there is a benefit to the employee even if they don’t proceed with purchasing the company’s ordinary shares. There are also other cases where companies will subsidise 25% of the total cost spent by the participants when making the share purchase. Some companies would even use their own funds to buy x ordinary shares for every x number of ordinary shares purchased by the participants.

The Staging of Employee Stock Purchase Plan

An Employee Stock Purchase Plan can encompass various stages, ensuring a structured and transparent process for employees:

  • Enrollment Period: This is the initial window for eligible employees to enrol in the ESPP. During this period, employees decide what percentage of their salary they wish to contribute through payroll deductions. Companies often provide informational materials and meetings to explain the plan’s details and benefits.
  • Offering Period: The offering period is the duration during which deductions are made from employees’ paychecks and accumulated in a designated account for stock purchases. This period has defined start and end dates for all participants and commonly lasts 12 to 18 months and may include multiple purchase periods within it.
  • Purchase Period: At the end of each purchase period (which can offus multiple times within an offering period), the accumulated funds are used to purchase company shares. The purchase is usually made at a discounted price compared to the market price. Some ESPPs include a “look-back provision,” allowing employees to purchase shares based on the lower of the stock price at the start of the offering period or on the purchase date, maximising their potential gain.

The Benefits of Employee Stock Purchase Plan

The plan provides numerous benefits for employers in Singapore:

  • Attracting and Retaining Talent: In a competitive job market like Singapore’s, an ESPP can be a powerful tool for attracting top talent and encouraging employee retention. By offering a stake in the company’s success, employers foster a sense of ownership and loyalty.
  • Cost-Effective Compensation: ESPPs can enhance the overall compensation package without significantly increasing cash outlays, which is particularly beneficial for companies managing cash flow.
  • Boosting Productivity and Morale: When employees own shares, they are more likely to be invested in the company’s performance, leading to increased motivation and productivity.

Not only does an Employee Stock Purchase Plan give many advantages to employers, it is also highly beneficial to employees in various aspects:

  • Potential for Financial Gains: The discounted purchase price allows employees to potentially profit from increases in the company’s stock value.
  • Ownership and Engagement: ESPPs promote a sense of ownership, aligning employee interests with the company’s success.
  • Retirement Planning: ESPPs can be a valuable tool for long-term investing and wealth building, providing financial security for employees long after retirement.
  • Tax Advantages: In Singapore, the tax implications for ESPPs are generally favourable. Employees who purchase shares through an ESPP may face tax on the discount received at the time of purchase, as it is considered a taxable benefit. However, capital gains from selling the shares are not taxed, as Singapore does not impose capital gains tax.
  • Flexible Contribution Options: Employees typically have options regarding how much of their salary they contribute, which allows them to manage their finances according to their personal circumstances.

What Happens to the Shares If the Employee Leaves the Company after Purchasing Them?

A key advantage of ESPPs is that once the employee purchases the shares or stocks, they own them outright, regardless of their employment status. Unlike some other equity compensation plans with vesting conditions, ESPP shares are typically not subject to forfeiture upon leaving the company. However, company-specific rules may apply, such as restrictions on selling within a defined period or limitations on participating in ongoing purchase periods after resignation.

How does Employee Stock Purchase Plans compare to Employee Stock Option Plans?

Employee Stock Purchase Plans and Employee Stock Option Plans both offer employees the opportunity to own company stock, but they operate through distinct mechanisms. An ESOP grants employees the option to purchase shares at a predetermined price, known as the exercise price, within a specific timeframe. These options often come with a vesting period, meaning employees must remain with the company for a certain duration before they can exercise their right to buy the shares. This structure makes ESOPs more complex and typically positions them as a long-term incentive, aligning employee interests with the company’s sustained growth. The employee only pays the exercise price when they choose to purchase the shares, which may be set at a nominal value, offering significant potential financial benefits if the company’s stock value appreciates over time.

In contrast, an ESPP allows employees to purchase shares directly, usually at a discount from the market price, often facilitated through regular payroll deductions. Unlike ESOPs, ESPPs generally do not involve a vesting period; employees contribute funds, and shares are purchased on their behalf at the end of a predetermined offering period. This direct purchase mechanism simplifies the process and allows employees to quickly acquire an ownership stake in the company. While ESPPs can provide immediate ownership and don’t require an upfront outlay like exercising an ESOP, they generally do not offer the same level of long-term incentive tied to sustained company performance.

Conclusion

Different types of plans will serve companies of different sizes and natures. However, the core purpose remains the same: to retain the best minds, drive long-term growth, and be the market’s next game changer.

If you are interested to find out more on ESOPs plans, read up on the key benefits of having an Employee Share Option Plan (ESOP) or learn about the challenges of ESOP implementation and how to conquer them.

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