STOCK OPTION PLAN: A STRATEGIC TOOL FOR EMPLOYEE RETENTION

In a competitive business environment characterized by unpredictable economic dynamics, Employee Stock Option Plans (ESOP) become more and more popular within companies.

These plans are seen as effective solutions to boost performance and optimize costs, particularly with regard to labor relations. By allowing employees to become shareholders, they align their interests with those of the company.

According to the definition given by the Romanian Tax Code, in Article 7, point 39, a stock option plan is a programme established by a legal entity which grants its employees, directors and/or managers or to an affiliated legal entity, the right to purchase at a preferential price or to receive free of charge a specified number of shares issued by the said entity. The ESOP can be successfully implemented by both listed and unlisted companies, including non-stock companies.

Benefits for employers and employees

The employee stock option plan benefits both the employers as well as employees.

Firstly, from an employer’s perspective, this mechanism has proven boost employee motivation and loyalty, driving staff to become more involved and loyal to the company. Employers can also grant shares issued by another company in the group. Secondly, the ESOP represents an effective alternative to direct salary increases, thus contributing to the optimization of salary costs.

Another advantage for the company lies in the favourable tax regime, since taxation only applies at the time of sale of the shares, loosening the immediate impact on its budget.

There are also benefits for employees, as they are allowed to actively participate in the growth of the company’s value. Furthermore, such plan is designed to offer them financial stability and additional income. Fiscally, the income generated by the ESOP is considered salary income, regulated by a more favorable taxation regime, since it is not subject to taxation when granted. Income tax is only due on the actual sale of the shares, where the capital gain is subject to taxation as investment revenue. Furthermore, dividends received from holding shares are also subject to taxation.

Legal and tax aspects

To implement an ESOP in Romania, several relevant provisions of national legislation are to be considered, including the Tax Code, the Companies Law and the Labor Code.

Thus, the Tax Code, under article 7, point 39, allows the ESOP to benefit from tax advantages, if the right to the shares is exercised after a minimum period of one year, that is to say that the programme must include a minimum period of one year between the granting and the exercise of the right (the purchase of shares).

The Tax Code also provides in article 94 that “in transactions with shares purchased at a preferential price or free of charge, as part of a stock-option plan, the gain is determined as the difference between the sale price and the tax value of the shares, represented by the preferential purchase price including the costs of the transaction. For those acquired free of charge, the tax value is considered equal to zero”.

On an operational level, the implementation of the ESOP within the company requires a decision on the part of management (for example, the General Meeting of Shareholders), which will define the terms of implementation of the ESOP as well as the incentive and remuneration plan for employees, directors/ managers. Thus, the company can approve such a plan in favour of the persons concerned (employees, directors, managers etc.), based on shares or other ownership titles (such as shares in the company, or another limited liability company owned by the company). In accordance with the plan approved by the General Meeting, these individuals will have the opportunity, for example, to acquire a specified number of shares representing a specific percentage (for example, up to 1-2%) of the company's shares, at a reduced price or even free of charge.

Once the shareholdings acquired, the holders benefit from all the rights associated with their status as shareholders. Therefore, such shares shall entitle them to a voting right in the General Meeting of shareholders, to receive dividends, as well as any other right related to the ownership over the shares the company concerned.

As we can see at glance, implementing such a plan involves administrative aspects that may seem discouraging. Indeed, due to relatively limited regulation in Romanian law, the development and implementation of the plan requires an effort to adapt to the structure of the company.

Last but not least, it should be noted that the implementation of such a plan may result in some dilution of existing shareholders, which requires the development of a very careful business strategy.

However, it is important to emphasize that ESOP is a functional model that has been in force for over 70 years in the United States and Europe, with some of the best results in some sectors, such as IT.