Our guide to Performance Share Plans

Our guide to Performance Share Plans

Our guide to Performance Share Plans

Performance share plans (PSPs) are a type of long-term incentive scheme that rewards employees with shares of the company based on the achievement of certain performance goals. In Malaysia, PSPs are becoming more popular among companies as a way to align the interests of employees and shareholders, motivate and retain talent, and foster a culture of ownership and accountability.

What are Performance Share Plans (PSPs)?

Performance share plans (PSPs) constitute a type of equity compensation where employees earn the right to receive company shares contingent on meeting or surpassing predefined performance goals across a typically three to five-year period. These objectives span financial, operational, or strategic metrics, such as earnings per share, revenue growth, return on equity, customer satisfaction, or market share. The number of awarded shares hinges on factors like an employee’s role, individual performance, and overall company performance.

In contrast to stock options that grant the right to purchase shares at a fixed price, performance shares involve no payment from employees. However, these shares are subject to vesting conditions, requiring employees to stay with the company until the performance period concludes and performance criteria are met. Failure to meet targets may result in a reduced share allocation or none at all.

Understanding Performance Share

Types of performance metrics used in PSP

There are three primary performance metrics commonly employed in performance share plans in Malaysia: Total Shareholder Return (TSR), Earnings-Based, and Strategic Goals.

Total Shareholder Return (TSR) Performance Shares
TSR performance shares tie the number of awarded shares to the company’s total shareholder return relative to a peer group or market index over the performance period, typically three to five years. For instance, if the company’s TSR ranks in the top quartile, employees may receive 150% of the target shares.

While aligning employee and shareholder interests, TSR performance shares may be influenced by external factors beyond employee control, including market conditions and investor sentiment. This approach may not necessarily reflect the underlying value creation or long-term strategy of the company, focusing more on short-term fluctuations in share prices.
Earnings-Based Performance Shares
Earnings-based performance shares link the number of awarded shares to achieving specific earnings-related metrics like earnings per share, net income, operating profit, or cash flow. This method aims to incentivise employees to improve the profitability and efficiency of the company. It provides a clear and transparent way to communicate and track performance goals and expectations to employees.

However, earnings-based performance shares may be susceptible to manipulation or distortion by accounting policies, adjustments, or one-off items. They may also fall short in capturing non-financial aspects of performance, such as customer satisfaction, innovation, or social responsibility. Additionally, this approach may inadvertently encourage short-termism or excessive risk-taking as employees focus on boosting earnings in the current period.
Strategic Goals Performance Shares
Strategic goals performance shares correlate the number of awarded shares with the accomplishment of specific strategic objectives such as market share, customer retention, product development, or environmental, social, and governance (ESG) criteria. Intended to motivate employees toward the company’s long-term vision, these shares foster a culture of innovation, collaboration, and social responsibility.

Though flexible to tailor performance criteria to the company’s industry and strategic priorities, strategic goals performance shares may be difficult to define, measure, and verify, leading to a potential lack of comparability or consistency. The performance criteria may also vary across different business units, functions, or regions, which can create conflicts or trade-offs for employees who must balance competing or contradictory goals, such as profitability and sustainability.

How Performance Share Plans work

Ever wondered about the inner workings of performance share plans? Let’s lay it out step by step:

  1. Setting the Scene: The company starts by defining the performance period, target shares, and metrics for each employee or group.
  2. Conditional Grants: At the beginning of the performance period, employees receive a conditional right to secure target shares, contingent on meeting specific conditions.
  3. Performance Focus: During the performance period, employees work towards achieving set goals while the company monitors and evaluates progress.
  4. Outcome Assessment: As the performance period concludes, the company calculates the actual shares awarded to each employee, ranging from 0% to 200% of the target.
  5. Delivery Process: The company delivers the shares, either as actual stocks or a cash equivalent, deducting applicable taxes and fees.
Advantages of Performance Shares

Advantages of performance shares

Performance share plans offer several benefits to both the company and the employees, such as:

Aligned Objectives
Employees and shareholders unite in the common goal of increasing the company’s value and share price.
Talent Retention
A powerful tool for motivating and retaining talent, rewarding employees for contributing to the company’s success.
Culture of Ownership
Fosters a culture of ownership and accountability, engaging employees in the company’s performance.
Tailored Approach
Offers flexibility and diversity, allowing companies to choose from various performance metrics and customise plans for different employee levels, roles, or situations.
Enhanced Compensation Package
Elevates the attractiveness and competitiveness of the compensation package, complementing the base salary and other benefits.

Performance share restrictions & risk

It’s important to remember that not all smooth sailing with performance share plans. Here are the constraints and risks to be mindful of:

  • Shareholder Dilution: Issuing new shares may dilute the ownership and earnings of existing shareholders.
  • Administrative Challenges: Implementation involves complexities and increased costs, including designing, monitoring, and complying with accounting, tax, and legal regulations.
  • Uncertainty and Volatility: The value and number of shares are subject to change based on performance and market conditions, introducing unpredictability.
  • Potential Misalignments: Performance metrics may not always align with the true value creation or long-term strategy, potentially incentivising undesirable behaviours or outcomes.

For expert insights into the implementation and optimisation of performance share plans in Malaysia, consider exploring the services offered by BoardRoom, a leading provider of employee stock options plan services and more. Contact us today to learn more!

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Comprehensive guide to Employee Stock Ownership Plan (ESOP) in Malaysia

Comprehensive guide to Employee Stock Ownership Plan (ESOP) in Malaysia

Comprehensive guide to Employee Stock Ownership Plan (ESOP) in Malaysia

This Comprehensive Guide to Employee Stock Ownership Plans (ESOP) in Malaysia navigates the intricacies of ESOPs within  Malaysia’s business landscape. From understanding the fundamentals of employee stock option plans to practical implementation, it’s your go-to resource. Whether you’re a business leader, HR professional, or just curious about stock options for employees, we shed light on their significance and how they contribute to organisational success in Malaysia.

Understanding Employee Stock Ownership Plan (ESOP)

As Malaysia faces a shortage of skilled labour, especially in the science and technology field, understanding how Employee Stock Ownership Plans (ESOPs) work may be key to attracting and retaining talent in Malaysia.

An ESOP is a scheme introduced by the company, issuing a share option to eligible employees by giving them the contractual right to acquire shares of the company in the future at a predetermined preferential price. This means employees gain the opportunity to become partial owners of the company, aligning their interests with its success.

Understanding employee stock options in Malaysia’s competitive landscape

How does an Employee Stock Ownership Plan (ESOP) work?

In essence, employees are given the right to purchase or receive shares, often at a predetermined price, also known as the exercise price. This process involves the allocation of stock options, which employees can later exercise, allowing them to become partial owners of the company.

The allocation and exercise of these share options are intricately linked to the company’s performance. As the company prospers, the share value typically increases, providing employees with a direct financial benefit. This mechanism aligns the interests of employees with the overall success and growth of the organisation.

ESOPs often include a vesting period, during which employees must fulfil certain conditions, such as completing a specified tenure, to gain full ownership of the allocated stocks. This not only encourages employee retention but also ensures a gradual transition of ownership rights, promoting a sense of long-term commitment.

Benefits of ESOP

Employee Stock Ownership Plans (ESOPs) offer diverse benefits for both employees and companies. They serve as powerful motivators, fostering ownership and commitment among employees. This alignment leads to increased productivity and a positive organisational culture. ESOPs contribute to employee retention and can be instrumental in attracting top talent in Malaysia. From the company’s perspective, ESOPs provide a strategic tool for sharing growth benefits, making them a notable example of stock options for employees. Overall, ESOPs create a mutually beneficial relationship between employees and organisations for sustained success.

Advantages of Performance Shares

Implementing an ESOP in Malaysia

Implementing an Employee Stock Ownership Plan (ESOP) in Malaysia requires a strategic and systematic approach aligned with the country’s legal framework. This begins with the careful design of the ESOP, addressing unique organisational goals, participant eligibility, share option allocation, and the vesting period.

Design of the ESOP
Designing the ESOP involves structuring the scheme to meet the company’s objectives. This includes deciding on the type of share options offered, whether they are outright grants or options to purchase at a predetermined preferential price. The design phase also considers the overall size of the stock pool, determining how many shares will be available for employees.
Addressing Unique Organisational Goals
Aligning the ESOP with organisational goals ensures that the plan serves as a strategic tool. This could involve fostering employee ownership to enhance motivation and engagement or using the ESOP as a retention strategy for key talent. Understanding and incorporating these specific goals into the plan’s design is crucial.
Participant Eligibility
Clearly defining participant eligibility establishes who, within the organisation, can benefit from the ESOP. This may involve criteria such as job roles, tenure, or performance levels. Striking a balance between inclusivity and strategic targeting is important to ensure the plan meets its intended purposes.
Stock Option Allocation
Determining how stock options are allocated involves deciding the amount granted to each eligible participant. This allocation can be based on various factors, including seniority, performance, or a combination of both. Striking a fair and motivating balance is key to the plan’s success.
The Vesting Period
Defining the vesting period outlines the timeline over which employees gain the right to exercise the granted stock options. This can be crucial in retaining talent, as it encourages employees to stay with the company to fully realise the benefits. The vesting period is often structured with a graded approach, providing increasing ownership rights over time.

A well-considered approach to these elements ensures the ESOP aligns with the company’s vision, engages employees effectively, and complies with legal requirements in Malaysia.

ESOP administration and compliance

Ensuring the effective functioning and legal adherence of Employee Stock Ownership Plans (ESOPs) in Malaysia relies on diligent administration and compliance efforts. Administrative excellence involves accurate record-keeping of stock options, allocations, and transactions, with that helps to streamline these processes for real-time access and enhanced efficiency. An online paperless approach also aligns with sustainability efforts and streamlines documentation, enhancing efficiency and cost-effectiveness.

On the regulatory front, staying informed about Malaysia’s legal framework is important. Adherence to guidelines from bodies like the Capital Markets and Services Act 2007 (CMSA) is essential to minimise risk of non-compliance.

Implementing robust security measures, such as two-factor authentication and regular updates, is essential to safeguard sensitive personal data. 

Administration and compliance of ESOPs in Malaysia require a blend of advanced technology that adheres to legal frameworks and a steadfast commitment to data security. This would ensure a smooth and successful implementation for companies considering employee incentive schemes,

BoardRoom helps companies design, implement and manage effective ESOS and ESOP programs

ESOP and other forms of employee ownership

ESOPs represent one form of employee ownership. Other structures include Performance Share Plans (PSP), Restricted Share Plans (RSP), Share Appreciation Rights Schemes (SAR), and Phantom Share Schemes (PSS). Each structure offers flexibility for companies to tailor ownership incentives based on culture, financial goals, and employee engagement preferences. The array of employee stock option plans allows for customisation within the broader spectrum of employee ownership.

Why is an ESOP good for a company?

Implementing an Employee Stock Ownership Plan (ESOP) can bring several advantages for a company: 

Employee Motivation and Productivity
ESOPs instil a sense of ownership, aligning employees’ interests with the company’s success and boosting motivation and productivity.
Talent Retention
ESOPs can be a powerful tool for retaining top talent. Employees who have a financial interest in the company are likely to stay longer, contributing to continuity and reducing turnover costs.
Attracting Talent
Prospective employees are drawn to companies with ESOPs, which offer them ownership opportunities. Such companies provide a competitive advantage in attracting skilled and motivated individuals.
Positive Organisational Culture
ESOPs contribute to fostering a positive organisational culture. Employees tend to feel a stronger connection to the company, promoting teamwork and a collective sense of achievement.
Financial Flexibility
ESOPs allow companies to reward employees without spending cash upfront, offering ownership through stock options. This is particularly beneficial for companies with limited resources for traditional bonus structures.
Succession Planning
ESOPs can facilitate smooth succession planning, allowing key employees to take on ownership responsibilities gradually and ensuring continuity and stability during leadership transitions.

ESOPs can be a strategic tool for enhancing employee engagement, attracting and retaining talent, and contributing to the overall success and sustainability of a company.

Frequently Asked Questions (FAQs)

1. What does ESOP stand for?

ESOP stands for Employee Stock Ownership Plan, allowing employees partial ownership through stock options or shares.

2. What is an example of an ESOP?

A notable example of an Employee Stock Ownership Plan (ESOP) is the one implemented by Publix Super Markets, Inc. Publix, a large U.S. supermarket chain, established an ESOP that gradually transitioned ownership to its employees. Through this plan, Publix employees have the opportunity to acquire shares of the company over time, aligning their interests with the overall success and growth of the organisation. This example illustrates how ESOPs can be used as a strategic tool to create a sense of ownership among employees and foster a positive workplace culture.

3. Are ESOPs good for employees?

Yes, ESOPs benefit employees through financial ownership, motivation, long-term retention, financial security, and potential participation in decision-making. Effectiveness depends on factors like the company’s financial health and communication strategies. Employees should always carefully consider the details of the ESOP in Malaysia, and companies should ensure clear communication to maximise the benefits for all parties involved.

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A closer look at Restricted Share Plans

A closer look at Restricted Share Plans

A closer look at Restricted Share Plans

Restricted share plans (RSPs) are a form of equity compensation that grants employees shares of company stock with certain restrictions. It can help employers attract, retain, and motivate talent by aligning their interests with those of the shareholders. RSPs can also provide tax benefits for both employers and employees, depending on the type and design of the plan.

In this article, we will explore the key concepts of restricted shares, the different types of RSPs, how they function, and their benefits. We will also discuss the legal and tax implications of RSPs and answer some frequently asked questions on this topic.

Definition of Restricted Share Plans

RSPs are a specific kind of equity compensation where employees receive company shares as part of their compensation package. These shares come with conditions: they either need time or certain achievements before employees fully own them. Additionally, there might be limitations on selling or transferring these shares, such as a holding period or the company’s right to refuse the transfer.

RSPs differ from stock options, which grant the right to buy shares at a set price in the future. Unlike stock options that become worthless if the stock price drops, restricted shares maintain value even if the stock price falls. However, there’s more risk involved with restricted shares – employees might lose them if they don’t meet the ownership conditions or violate transfer restrictions.

Understanding Restricted Shares

Key concepts of restricted shares

Some key concepts are essential to understand when dealing with restricted shares, such as:

  • Fair Market Value (FMV): This is the share price in an open market, determined by stock supply and demand. FMV is typically based on the stock’s closing price during grant, vesting, or sale.
  • Grant Date: The day the company awards restricted shares, establishing the plan’s terms.
  • Vesting Date: When employees meet vesting conditions and gain full ownership of shares. It can be a fixed date, a series, or linked to specific events like an IPO or merger.
  • Vesting Schedule: The timetable dictating when and how shares vest. It can be “cliff vesting” (all at once after a set period) or “graded vesting” (gradual portions over time).
  • Taxation: Involves determining and paying taxes arising from restricted share grants, vesting, and sale. Taxation specifics depend on factors like share type, timing, FMV, and relevant tax laws.

Different types of Restricted Share Plans

There are two main types of RSPs: restricted stock awards (RSAs) and restricted stock units (RSUs). Both are forms of restricted stock, but there are some key differences between them.

Nominal Purchase Price
A nominal purchase price may be required for RSAs, depending on the plan. RSAs entail direct grants of company shares to employees at the grant time, subject to vesting and transfer restrictions.

RSUs, on the other hand, involve commitments to provide shares or a cash equivalent to employees upon vesting, with transfer restrictions.
Share Ownership
Another difference between RSAs and RSUs is the share ownership granted to employees. RSAs confer immediate shareholder status, including voting and dividend rights, unless specified otherwise. Meanwhile, RSUs do not grant actual shares or ownership rights until vesting occurs, and dividend equivalents may or may not be included, depending on the plan.
How Restricted Share Plans Work

How Restricted Share Plans function

In Malaysia, restricted share plans are typically crafted and overseen by the employer, aligning with the company’s compensation strategy. The employer defines eligibility criteria, the quantity and value of granted shares, the vesting schedule, transfer restrictions, and the tax treatment of the plan.

The employer reserves the right to modify, amend, or terminate the plan, guided by the plan’s terms and relevant laws. Additionally, the employer may exercise discretion to expedite or waive vesting or transfer restrictions under specific circumstances, such as a change of control, termination, or the employee’s death or disability.

Upon receiving the grant, the employee must accept and adhere to the plan’s terms. If applicable, the employee may need to pay a purchase price for the shares. Compliance with vesting and transfer restrictions is mandatory, and the employee is responsible for reporting and settling any taxes associated with the plan.

Legal and tax implications of restricted shares

The implementation of RSPs carries legal and tax considerations contingent upon the jurisdiction, plan type, design, and grant circumstances. Some of the common legal and tax issues that may arise are:

  • Securities Laws Compliance: Complying with securities laws and regulations that regulate the issuance, registration, and trading of restricted stock, such as the Capital Markets and Services Act 2007, the Securities Commission Act 1993 in Malaysia.
  • Employment Laws Compliance: Complying with employment laws and regulations that regulate employment terms and conditions, such as the Employment Act 1955 and the Industrial Relations Act 1967 in Malaysia.
  • Tax Laws Compliance: Complying with tax laws and regulations that regulate the taxation of restricted stock, such as the Income Tax Act 1967.

Due to the intricate and case-specific nature of legal and tax implications associated with RSPs, seeking guidance from a certified tax advisor before implementing or participating in an RSP.

How can BoardRoom help

Restricted share plans are a structured equity compensation method providing employees in Malaysia with company shares under specific conditions. These plans can efficiently meet compensation objectives for both employers and employees, offering mutual tax advantages. However, you must consider challenges like potential share loss, tax liabilities at vesting, and legal compliance and grasp the key concepts, types, functions, benefits, and implications of these plans before implementation.

If you’re looking for a dependable partner for your restricted share plans in Malaysia, BoardRoom offers professional corporate services. As a leading provider in Malaysia, BoardRoom assists with designing, implementing, and administering various employee share option schemes, including RSPs, stock options, and performance shares. Contact us today to learn more!

BoardRoom helps companies design, implement and manage effective ESOS and ESOP programs

Frequently Asked Questions (FAQs) on Restricted Share Plans

What is the treatment of restricted shares after employment ends?

Treatment varies based on plan terms, termination reasons, and timing:

  • Pre-vesting termination or voluntary exit: Shares are usually forfeited without compensation.
  • Post-vesting termination or voluntary exit: Employees typically keep shares and pay taxes but face transfer restrictions.
  • Termination without cause, retirement, death, or disability: Pro-rated/full vesting may occur. Transfer restrictions exemptions may apply.

How do restricted shares influence the ownership structure of the company?

Restricted shares can alter ownership structure by adjusting the number and percentage held by employees, management, and existing shareholders. They tend to increase ownership for employees and management but may decrease it for existing shareholders due to share dilution. The influence depends on the granted shares’ number and value, vesting conditions, transfer restrictions, and share market prices.

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Employee share option schemes: a boost for Malaysian employers

Employee share option schemes a boost for Malaysian employers

Employee share option schemes: a boost for Malaysian employers

In today’s competitive business landscape, attracting and retaining top talent has become a key consideration in Malaysia, particularly for startups. The ability to secure and nurture skilled professionals can significantly enhance a company’s growth trajectory.

This is where an employee share option scheme (ESOS) can help. A type of employee share plan, an ESOS offers an enticing solution that aligns the interests of an employee with the success of their company.

This article delves into the advantages of ESOS, exploring how equity compensation can be a powerful tool for attracting, retaining and engaging top talent in Malaysia.

Understanding employee stock options in Malaysia’s competitive landscape

Malaysian business leaders continue to face the challenge of skills shortages. Despite efforts by the government and private enterprises, many of Malaysia’s employers, particularly those in the technology sector, face difficulty filling vacancies.

Thirty-seven occupations are listed in the latest Critical Occupations List (MyCOL), an annual report commissioned by the Malaysian Government. From managing directors and CEOs to earth-moving operators and truck drivers, the list spans a range of industries where skills shortages are critical.

Given the talent shortages, attracting and retaining top talent is a priority for businesses in Malaysia. Therefore, many are exploring incentives such as employee share option schemes (ESOS) as a way to reward and incentivise employees and engender loyalty.

An ESOS gives employees the option to purchase company shares at a predetermined price, offering a unique opportunity to become shareholders themselves. This connection between employee and company ownership fosters a sense of belonging.

Nora Jasmine Lai, Operations Manager of Employee Plan Services, BoardRoom Group, explains, “The purpose of these programs is to align the company’s goals with employee incentives by allowing the employee to become a part owner of the company and participate in the growth of the business.”

The schemes can be complex and challenging to understand. For example, an ESOS has similarities to an employee share ownership plan (ESOP), though the two vary in terms of the structure, governance, purpose and nature of ownership. However, they broadly aim to achieve the same thing, which is to provide long-term incentives to employees.

Understanding employee stock options in Malaysia’s competitive landscape

Employee benefits in Malaysia: why employers should consider ESOS

Schemes such as ESOS and ESOP provide long-term value for employers by inspiring loyalty among employees. By signing an employee up for the scheme, an employer is essentially saying to them that while they are committed to the growth of the business and contributing to it, they will be rewarded by becoming a shareholder.

As more employees join, the talent within the company grows, strengthening it over time.

Employee turnover costs more than you think

In a competitive landscape, no business leader wants to lose good employees. Experienced employees hold institutional knowledge that can be lost when they leave which can disrupt a business. They are also more likely to have established important relationships with customers and other staff. On the other hand, hiring and training new employees takes time and money. High turnover can destabilise employees, damage a business’s reputation and harm customer relationships.

A report from Employee Benefit News found that it can cost a business more than 30% of the employee’s yearly salary to replace them.

Employee retention comes down to many factors. Employees want to feel valued, engaged and an important part of the team. TINYpulse reports that those workers who feel they have control over their careers are more likely to stay than those who don’t. Employees who are dedicated to their workplace achieve more and are 87% less likely to leave their workplace than those who aren’t. Finally, employees who report they are ‘engaged and thriving’ are much less likely to be searching for other jobs than those who are not.

Employee turnover costs more than you think

How employee share option schemes reduce turnover and benefit employees

There are many benefits of employee share option schemes. They give employees a sense of ownership and their interests become more aligned with other shareholders. Employee engagement also increases as the schemes motivate them to be more productive and focus on overall business success rather than just their day-to-day responsibilities.

It is not just the company that benefits. “The financial gains from an ESOS are defined by the difference between a company’s stock price and the exercise price of the ESOS, which is fixed when ESOS are granted,” Nora says. “Therefore, the higher the stock price, the larger the financial gain. Employees who are granted an ESOS are incentivised and motivated to act in the company’s interest. This, in turn, improves the investor’s perception of the company’s ability to earn and grow its profits in the future, which increases the demand of the company’s shares and therefore, its share price.”

The higher the share price, the larger the financial gain for the employee. Through ESOS, an employee’s financial growth is directly tied to the company’s stock market performance, serving as a strong motivator for employees to contribute to the company’s success.

ESOS in Malaysia: what are the implementation challenges?

There is no doubt that schemes such as ESOSs and ESOPs are valuable tools for employers to attract and retain talent. There are also many benefits to the employee in such a scheme. However, establishing and implementing any type of employee share scheme can be complicated, and the administration and maintenance of such schemes can be onerous for already busy managers and business owners.

“When businesses implement an ESOS, one of the key challenges is helping employees understand how it works,” says Nora. “From the employer’s perspective, managing an ESOS program involves hefty administrative tasks, such as preparing the grant letters, tracking the ESOS data, communicating information to the employees and addressing any questions from time to time.”

The benefits, however, far outweigh the challenges. As we have touched on, setting up and maintaining a scheme can help retain valuable employees, attract top talent and improve productivity. So, how do businesses overcome the challenges and enjoy the benefits of an employee share option scheme?

Administering an employee share option scheme

When establishing a scheme such as an ESOS or ESOP, a company will engage a corporate services provider so they can set up a platform where employees can access useful information on their ESOS holdings.

It is important for businesses to have a platform that effectively implements and maintains the scheme. The platform should enable the employee to easily check on their holdings and guide them on how to transact and update their information. Clear communication about the scheme is also vital so all employees are constantly working towards common goals.

Many businesses choose to outsource the administration of this portal or platform so they can focus on their core objectives. “A good ESOS platform should be easy to understand and easily accessible,” says Nora. “At BoardRoom, we have partners covering end-to-end plan designs, lawyers who are skilled in this area, and administrative services to oversee the schemes on behalf of the company.”

BoardRoom’s comprehensive, user-friendly and secure platform, EmployeeServe, keeps the employees engaged with their company’s employee share scheme.

BoardRoom helps companies design, implement and manage effective ESOS and ESOP programs

How BoardRoom can help

An ESOS is an innovative and compelling way to attract, retain and engage exceptional employees. By linking employees’ success with that of the company, an ESOS helps create a shared goal of growth, prosperity and long-lasting success.

As the business ecosystem in Malaysia continues to evolve, embracing an ESOS could be the key for businesses looking to secure talent and unlock a competitive advantage.

BoardRoom offers tailored solutions to help companies design, implement and manage effective ESOS and ESOP programs. Our software, EmployeeServe, is easy to use and is mobile optimised so that employees can access the portal 24/7 with the latest real-time data on their holdings. The software’s security features also offer peace of mind to employers and employees.

BoardRoom’s team is available to answer questions and offers personalised support to discuss employee share plans such as ESOPs, ESOSs and other employee stock option plans.

Contact our team and discover how we can support your business today.

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Understanding ESOS and tax implications in Malaysia

Understanding ESOS and tax implications in Malaysia

Understanding ESOS and tax implications in Malaysia

Employee share option schemes (ESOS) have become increasingly popular among companies in Malaysia as a way to retain top talent and boost productivity. They offer employees the option to purchase company shares at a discounted price, which can result in a significant financial gain if the company performs well.

In this article, we will discuss the fundamentals of ESOS and why they are a valuable tool for employers. We will also examine the tax implications of ESOS in Malaysia; the regulatory bodies and laws governing ESOS taxation; and best practices for companies and C-suite leaders to achieve compliance and minimise tax liabilities.

What are ESOS?

ESOS are a form of employee compensation that allows employees to purchase company shares at a discounted price. These schemes are designed to incentivise employees to work productively and contribute meaningfully to the company’s success, as their financial gain is tied to the company share price movement. The higher the increase in share price, the larger the financial gain to the employees.

ESOS typically have a vesting period, meaning that employees must wait a certain amount of time before they can purchase shares. This period is intended to encourage employees to remain with the company longer and to align their interests with those of the company.

ESOS versus Employee Stock Ownership Plan (ESOP)

An ESOS (Employee Stock Option Scheme) and an ESOP (Employee Stock Ownership Plan) are both employee benefit programs that involve providing employees with a stake or ownership in the company.

However, there are some differences between the two:

  • Nature of ownership
  • Purpose
  • Structure and funding
  • Control and governance

Plan types such as restricted share plans and performance share plans all have different objectives but can all be categorised under long-term incentive plans.

Employee Benefits

Tax implications of ESOS in Malaysia

One of the most critical factors companies must consider when implementing ESOS is the tax implications for the business and their employees.

Failure to comply with tax regulations can result in significant financial penalties and reputational damage. Therefore, it is crucial that companies fully understand the tax requirements of ESOS in Malaysia and take steps to ensure compliance.

ESOS tax implications for employers and employees

ESOS can have different tax implications for both employers and employees.

For Malaysian employers, ESOS are usually considered a non-deductible expense for a company. Employers are required to report the value of the options granted to employees as an expense on their financial statements under Malaysian Financial Reporting Standard (MFRS) 2. The employer would also be required to deduct income tax from the amount of gain realised by the employee on the exercise of the option.

Employees who exercise their options to purchase shares are subject to income tax on the difference between the market value of the shares at the time of exercise and the option exercise price paid. The individual income tax rate in Malaysia varies depending on the chargeable income of the individual, with rates ranging from 0–30%.

Calculating ESOS tax liabilities

Companies must accurately calculate the tax liability associated with share options for both the employer and employee to ensure compliance.

Under MFRS 102, companies are required to recognise the fair value of the share-based payment as an expense in their financial statements. The fair value of the share-based payment is determined at the grant date, taking into account the exercise price, the term of the option, the current price of the underlying share and the expected volatility of the share price.

Once the fair value of the share-based payment has been calculated, it is recognised as an expense over the vesting period.

Tax Liabilities

How to ensure ESOS compliance

In Malaysia, the regulation of ESOS is overseen by several government bodies, including the Securities Commission Malaysia and the Inland Revenue Board of Malaysia (IRBM).

Under Malaysian law, ESOS tax treatment varies depending on whether the option is granted to a local or foreign employee. Local employees are subject to Malaysian tax on the gain from exercising the option. In contrast, foreign employees are taxed only on the portion of the gain attributable to work done in Malaysia.

Penalties for non-compliance with ESOS taxation regulations can be severe. Companies that fail to comply with ESOS regulations may face fines, penalties and legal action from the authorities.

Best practices for C-suite leaders

C-suite executives can support ESOS compliance while minimising tax liabilities by implementing the following best practices in their organisation:

  • Engage with tax experts who can provide guidance on the tax implications of ESOS and assist in accurately calculating tax liabilities for your business and your employees.
  • Ensure compliance with all regulations and laws governing ESOS taxation in Malaysia.
  • Develop a comprehensive understanding of the accounting for share options under MFRS 102. This accounting involves measuring the fair value of the options, recognising an expense in the income statement and recognising a liability in the balance sheet.
  • Keep accurate records of all ESOS transactions and ensure that all employees are adequately informed and educated about the tax implications of their share options.
Best Practices

Common pitfalls to avoid

Despite the importance of compliance and accurate tax calculation, there are some common pitfalls that companies and C-suite leaders can encounter when it comes to ESOS taxation, including:

  • failure to accurately calculate the tax liability associated with share options, which can result in underpayment or overpayment of taxes;
  • incorrectly accounting for share options under FRS 102, which can lead to misstated financial statements and regulatory compliance issues; and
  • failure to meet ESOS reporting obligations.

Woon Chee says it is not enough to ensure your company pays its ESOS taxes on time; it is also important to be aware of and fulfil the reporting requirements that follow. For example, she notes that “upon launching the ESOS, the employer has to notify the IRBM within 30 days after the expiry date of the period of acceptance of the offer.”

How to avoid pitfalls

To avoid these mistakes, it is crucial for companies to engage with an expert ESOS provider who:

Offers a comprehensive platform for ESOS management that gives your employees and HR professionals full visibility of the details and status of each scheme
Possesses a deep knowledge of local tax laws within the jurisdictions your organisation operates, a wealth of ESOS management and relevant professional qualifications
Specialises in an integrated suite of corporate services alongside ESOS management, including taxation, accounting and payroll (so that all the expertise you need is easily, quickly accessible via one point of contact)

Woon Chee urges businesses not to underestimate the power of an innovative ESOS management platform.

“A good ESOS platform shows you all the details of every ESOS, so it’s easy for you to keep track of them and will largely reduce your tax liability,” she says.

It also takes the guesswork out of tax calculations so you can have confidence in your regulatory compliance.

Unlock the power of ESOS

ESOS is a powerful tool for retaining talent and boosting productivity, but C-suite leaders need to have a comprehensive understanding of the tax implications and regulatory requirements for ESOS in Malaysia.

By engaging with tax experts, staying up to date with regulatory requirements and following best practices for compliance and accurate tax calculation, companies can minimise tax liabilities and ensure that their ESOS programs successfully achieve their intended goals.

At BoardRoom, we offer expert accounting and tax advisory services across the Asia-Pacific region. By engaging our tax professionals, you receive access to specialist guidance and support to ensure compliance with all regulatory requirements and minimise tax liabilities related to ESOS.

Additionally, we can connect you with trusted consultants to support you with plan design, prior to implementing, so that your schemes are tailored to your needs.

Please contact us to find out how our world-class ESOS services can benefit your business.

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

Employee Share Plans in Malaysia

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

How Employee Share Plans work in Malaysia

Essentially, an Employee Share Plan is a remuneration package that can reward employees of both privately held and publicly listed companies in Malaysia with either:

  • the company’s ordinary shares; or
  • the option to buy these shares in the future at a subsidised rate.

Employee Share Plans are an effective way to attract and motivate your employees while providing an incentive for them to contribute to long-term company performance. These plans can help you to retain and reward your talent whilst managing company cash flow or working capital.

You can use several Employee Share Plan types to provide cash-free remuneration to staff, including:

  • Employee Share Option Schemes (ESOSs);
  • Share Award Schemes (SASs)
  • Performance Share Plans (PSPs)
  • Restricted Share Plans (RSPs); and
  • Employee Share Purchase Plans (ESPPs).

Our guide to each type below can help you to decide on the best option for your company.

Employee Share Option Schemes (ESOSs): ESOS Meaning & Details

An Employee Share Option Scheme (ESOS) gives employees the contractual right to buy company shares at an exercise price in the future. The reason for this is, the greater the share price, the greater the gain from exercising their options. Typically, you will assign a preferential, pre-determined price or benchmarked value to the share options. It is worth noting that employees are not obligated to purchase these shares, however this right is granted to incentivise employees to continue working hard, as they will directly reap benefits if the company’s share price rises.

An ESOS case study example

Nora Yeoh, the Chief Operating Officer of Jack Manufacturing Company, has received a share option offer to acquire 50,000 company shares. The offer price (also known as the exercise price) per share is RM20.00. There can be a moratorium period which Nora will not be able to exercise the options, which is called a vesting period. Once the moratorium has been lifted, Nora’s options are now vested, and Nora can pay an exercise cost to acquire the shares within a specified period of time.

There could also be certain performance criteria that Nora will have to fulfil before the options vest.

Assuming that the share options vest and Nora is still working at the company on 1 April 2020, she can choose to exercise her share options. If she does this, she will pay RM20.00 per share to receive 50,000 shares in the company.

Malaysia Employee share option schemes

Share Award Schemes (SASs): SAS Meaning & Details

A Share Award Scheme (SAS) is very similar to an ESOS. The key difference is that employees are rewarded with actual share ownership from the outset, instead of only receiving the option to buy future shares.

As with an ESOS, there could also be certain criteria or performance metrics that the employee will have to fulfil.

To prevent share dilution, companies often only allot 15% of their current outstanding ordinary shares at any time to use in an SAS.

As outlined in the table below, there are two types of SAS:

  • Performance Share Plans (PSPs); or
  • Restricted Share Plans (RSPs).
Type of SASPlan 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 Managers

– Heads of Department


– Listed and Private Companies
RSP3 YearsAnnually


– Economic Value Added

– Manager 

Performance Share Plans (PSPs): PSP Meaning & Details

Performance Share Plans (PSPs) are typically aimed at a company’s senior management team. They provide incentives to focus on delivering long-term company performance that creates shareholder value. To help achieve longer-term company objectives, PSPs tend to have longer plan durations (often 3-5 years), and the shares vest at the end of a PSP.

Some companies have a claw-back policy that requires the individual to return a certain number (if not all) of their rewarded shares if their performance is dissatisfactory.

A PSP case study example

After joining the Jack Manufacturing Company Performance Share Plan (PSP), Sarah Perry was allotted 1,000,000 shares on 1 April 2020. At each annual performance evaluation, Sarah receives a score that is independent of her score in previous years.

At the end of her three-year period, Sarah receives 900,000 ordinary shares, based on the average of all of her scores. She can choose to keep or sell these shares. However, she knows that keeping them allows her to enjoy voting rights and makes her eligible to receive dividend payments.

Sarah’s PSP results appear in the table below:

Evaluation Date (Annually)2 April 20212 April 20222 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

Restricted Share Plans (RSPs): RSP Meaning & Details

Restricted Share Plans (RSPs) work similarly to PSPs, but over a shorter term.  The key difference is that shares in an RSP vest annually, which means these plans tend to better suit companies with short-term objectives.

An RSP case study example

After joining the Jack Manufacturing Company Restricted Share Plan (RSP), Peter Li was allotted 1,000,000 shares on 1 April 2020. The RSP plan has a three-year duration and two vesting periods.

The first vesting date is 2 April 2022. On this date, 50% of Peter’s allotted shares will vest based on his performance from 2 April 2020 until 1 April 2022.

The second vesting date is on 2 April 2023. On this date, the remaining 50% of Peter’s allotted shares will vest, depending on his performance from 2 April 2020 till 1 April 2023.

During the first vesting period, Peter only manages to reach 95% of his pre-set target. The Remuneration Committee (RC) therefore decides to vest only 450,000 shares. They could place the remaining 50,000 shares back in the company’s treasury account, or evaluate it again towards the second vesting period.

For simplicity, let’s assume for this example that they place Peter’s unvested 50,000 shares back into Jack Manufacturing Company’s treasury account.

During the second vesting period, Peter performs well and manages to reach his target. The RC therefore decides to reward him with 500,000 shares.

At the end of the three-year period, Peter has received a total of 950,000 ordinary shares. Like Sarah, he can choose to keep or sell the shares.

Peter’s PSP results appear in the following table:

Vesting Period2 April 20222 April 2023
Performance Metrics95%100%
Total Awarded450,000 + 500,00 = 950,000
Employee Shared Plan in Malaysia

Employee Share Purchase Plans (ESPPs): ESPP Meaning & Details

You can offer this type of Employee Share Plan to all company employees. Effectively, it means your company subsidises employees to buy ordinary shares in the company.

In an Employee Share Purchase Plan (ESPP), you automatically deduct a portion of the employee’s gross income every month and place it in a separate company account for a minimum one-year period. These plans also usually do not have a vesting period.

At the end of the year, the employee can either:

  • choose to use those funds to purchase ordinary shares; or
  • have the money transferred back to their personal account.

As an extra incentive for employee participation, you can also offer a good interest rate on the set-aside funds. This means that the employee benefits even if they don’t choose to buy your company’s ordinary shares.

Other effective participation incentives include:

  • subsidising a certain amount (such as 25%) of the total cost of any shares that an employee purchases; and
  • share purchase matching, in which your company uses its own funds to buy x number of ordinary shares for every x number of ordinary shares the employee buys.

Which Employee Share Plan is best for my company?

In theory, you can use any of the Employee Share Plans in this article to provide cash-free remuneration to staff. However, you still need to consider the complexities and administrative costs of each option.

In our experience, coming up with a single Employee Share Plan that will work for everyone is not possible. That’s why we have designed a specialised digital Employee Share Plan system that is completely flexible.

Our experts can provide you with a purpose-built solution for your needs that will increase efficiencies and reduce costs, while still complying with current and future reporting requirements.

Choose BoardRoom as your trusted Employee Share Plan firm in Malaysia

If you are looking for reliable ESP services in Malaysia from a reputable provider, BoardRoom is your optimal choice. Our expert team has years of experience providing advice, solutions, and services for companies of all sizes and industries, whilst ensuring your organisation stays compliant with all local laws and regulations. Whether you have questions about the best Employee Share Plan options (ESOS, ESPP, or otherwise), the meaning and implications of choosing these plans, how to implement them, and so on, we are happy to assist.

We are also proud to use innovative technologies as part of our offerings – as such, we have designed an all-encompassing Employee Share Plan solution that combines the experience of our expert team with a powerful digital platform, EmployeeServe.

Contact us today to find out more about our comprehensive Employee Stock Option Plan (ESOP) services.

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