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What is an Employee Share Option (ESOP)?

ESOP plans give the employee the rights to purchase shares in the company at a specific pre-determined price within a time frame.


Retaining talents is essential for a company's development and maintaining a competitive advantage. The company must operate the entity with the best mind with in-depth industry-specific skills and experience. In order to effectively solve this issue, we have seen a proliferation of companies adopting an Employee Share Plan (ESP). As a result, it not only retains employees, but also motivates them to work toward company goals instead of their own.


The Employee Share Plan is essentially a remuneration package. After meeting certain performance criteria, employees can get the company's ordinary shares awards through subsidies or free. Some examples of Employee Share Plans include the Employee Share Award Scheme (ESAS) and the Employee Share Purchase Plan (ESPP).


Employee Share Award Scheme (ESAS)

The plan is usually provided to directors or senior management. If they meet certain criteria or performance indicators set by the company, they will be rewarded with the company's ordinary shares. Initially, participants (directors or senior managers) will be allocated X restricted shares. At each vesting period (usually every year), a part of the allocated shares will be vested and become unrestricted shares, and then participants can enjoy the benefits of owning actual shares (i.e. selling, voting rights, dividend payment). The number of shares vested and converted into unrestricted shares will depend on the performance of participants during the evaluation period.


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


Types of ESAS

PSP


Plan Duration

3-5 Years


Vesting Period

End of Plan (With Annual Evaluation)


Performance Metric

– Total Shareholder Return

– Return on Equity

– Return on Sales

– Market Ranking


Participant

– Directors

– Non-Executive Directors

– Senior Manager

– Head of Department


Target Companies

– Listed Companies (Including Mainboard and Catalist)


Types of ESAS

RSP


Plan Duration

3 Years


Vesting Period

Annually


Performance Metric

– EBITDA

– Economic Value Added


Restricted Share Plan (RSP)

In contrast to PSPs that focus on long-term plans, companies that use such plans usually aim to ensure that short-term (i.e., annual) goals are met and satisfied.


Generally, the company will only allocate up to 15% of the company’s current issued ordinary shares to all its qualified participants at any time to prevent overpowering in any form.


Performance Share Plan (PSP)


Please note that in some companies, a "claw-back policy" may be introduced. This policy will require individuals to return a certain amount (if not all, all) of the rewarded ordinary shares, should the performance achieved be deemed unsustainable, for a certain number of years after the PSP plan.


Companies that adopt such plans usually aim to ensure that long-term goals are achieved, while RSP focuses on short-term goals. In addition, such policies will encourage individuals to continuously reflect and improve the strategies adopted to ensure long-term sustainable performance.


Employee Share Purchase Plan (ESPP)

The plan applies to all employees of the company. The company will effectively subsidize employees to purchase the company's ordinary shares.


A portion of participant's (employee) monthly gross income will be automatically deducted every month and deposited into a separate account (sitting with the company) for at least one year. At the end of the year, participants can choose to use these funds to purchase ordinary shares, or transfer them back to participants’ own accounts. In order to motivate participants to participate in the program, the company will provide favorable interest rates for the reserved funds. Therefore, even if employees do not proceed to buy the company’s ordinary shares, it will benefit them. There are also other cases where companies will subsidize 25% of participants' total cost when buying shares. Some companies will even use their own funds to purchase x ordinary shares for every x ordinary shares purchased by participants.


Gains from Employee Share Options (ESOP) / Employee Share Ownership (ESOW)


Gains and profits arising from Employee Share Options (ESOP) and other forms of Employee Share Ownership (ESOW) are subject to tax.


Employee Share Option (ESOP)

An employee who is granted share options by an employer will be taxed on any gains or profits arising from the exercise of the share option.


Other Forms of Employee Share Ownership (ESOW)


ESOW plans allow an employee of a company to own or purchase shares in the company or in its parent company. They include share awards and other similar forms of employee share purchase plans (excluding phantom shares and share appreciation rights).

An employee who is granted ESOW by the employer is subject to tax on any gains or profits when the ESOW plan vests on the employee.


This applies to ESOP/ESOWs:


a) Granted by an overseas parent company operating a group ESOP/ESOW plan; or


b) Granted to a person as a result of any office held by him (e.g. a director).


When Tax is Payable on ESOP and ESOW


ESOW Plans with No Vesting Imposed

The gains are taxable in the year when the shares are granted.


ESOP/ESOW Plans Granted with Vesting Imposed while you are exercising employment in Singapore


Granted on or after 1 Jan 2003 The gains or benefits from any ESOP/ESOW plans are taxable in Singapore. This is regardless of where you exercise the ESOP or the ESOW plan vests, as the gains will be taxed to the extent that they are connected with your employment in Singapore.

The gains are taxable even when you exercise the ESOP or the ESOW vest after your employment in Singapore has been terminated or you are posted overseas.


Granted before 1 Jan 2003

The gains or benefits from any ESOP/ESOW plans are taxable in Singapore if the ESOP/ESOW plans are exercised/vested while you are physically present in Singapore or employed in Singapore.


ESOP/ESOW Plans Granted with Vesting Imposed while you are NOT exercising employment in Singapore


This does not apply if you were temporarily away, as such absence from Singapore would be treated as incidental to your employment in Singapore.


Exercised or vested on or after 1 Jan 2002

The gains or benefits from any ESOP/ESOW plans are not taxable in Singapore.


Exercised or vested before 1 Jan 2002

The gains or benefits from any ESOP/ESOW plans are taxable in Singapore if the ESOP/ESOW plans are exercised/vested while you are physically present in Singapore or employed in Singapore.


How Gains are Taxed


Gains from ESOW plans with no vesting imposed

The gains are taxable in the year when the shares are granted.

Gains from ESOP/ESOW plans with vesting imposed


Granted on or after 1 Jan 2003

ESOP/ESOW plans


Without selling restriction:

Taxable in the year when

  • you exercised the ESOP or

  • the shares under ESOW plan is vested on you

With selling restriction (moratorium):

Taxable in the year when the selling restriction is lifted


Granted before 1 Jan 2003

ESOP/ESOW plans


Without selling restriction / With selling restriction (moratorium):


Taxable in the year when

  • you exercised the ESOP or

  • the shares under ESOW plan is vested on you

For foreigners and Singapore permanent residents (SPRs)


Deemed exercise rule applies when you terminate your employment or leave Singapore permanently.


How Gains are Computed


Without Selling Restriction Gains from ESOP = Open market price of share on date of exercise less price paid for the shares (exercise price)

Gains from ESOW plan (with vesting imposed) = Open market price of share on date of vesting less price paid for the shares

Gains from ESOW (with no vesting imposed) = Open market price of share on date of grant less price paid for the shares


With Selling Restriction (Moratorium)

Open market price of the shares on the date the selling restriction is lifted less exercise price of the shares = Taxable gain


Conclusion

Different types of plans will serve companies of different sizes and natures. But the core goal remains the same, which is to retain the best minds, promote long-term growth and become the next game changer in the market.


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