Restricted (Clogged) Share Schemes: Employee Incentive Schemes Series

Article 3 of 4

Introduction

In the first two articles of this series, we covered the Key Employee Engagement Programme (KEEP) and Restricted Share Schemes[1], which are excellent ways to incentivise and retain key employees in the short and medium term.

In this article, we focus on Restricted (Clogged) Share Schemes. These schemes give employees immediate equity ownership but with certain restrictions, ensuring long-term alignment with the company’s goals.

Restricted (Clogged) Share Schemes

Under a restricted share or clogged share scheme, the key employee acquires shares in the company at a discounted rate. However, the shares are restricted, in that the holder is required to retain the shares for a fixed period (the ‘clog’ period) before he or she can assign, transfer, pledge or sell the shares.

Employers must establish a trust (or an arrangement approved by Revenue which is similar to a trust) for the benefit of the employee, to hold the shares for the duration of the clog period. The restricted shares must be held in the trust for at least one year. As with share options, employers typically apply good and bad leaver provisions to restricted shares described above to determine what happens if an employee leaves during the clog period.

PAYE, USC and employee PRSI arise on the award of restricted shares. However, the taxable value of the shares on acquisition is reduced by reference to the length of the clog period, up to a maximum reduction of 60% where the restriction period exceeds five years. Accordingly, the longer the clog period, the greater the reduction in the initial tax charge.

Key features

• Ulike share options, restricted shares are issued as shares from the outset, although held on trust for the employee. Therefore, voting rights and entitlements to dividends are limited until the expiry of the clog period.

• The clog period is designed to incentivise key employees to remain with the business for the duration of the restriction.

• On the expiry of the clog period, the employee can then dispose of the shares, however, any gain on the disposal will be subject to capital gains tax.

• Companies often elect to include additional controls to protect value and retain influence over employee-held shares, even after the expiry of the clog period. These controls include linking shares to a future corporate or liquidity event so that leaving early reduces their value, imposing transfer restrictions or rights of first refusal, including repurchase or clawback provisions if the employee departs or breaches covenants, tying shares to performance milestones, or using deferred consideration or earn-out structures to ensure employees remain aligned with the company’s long-term objectives.

Conclusion

Restricted Share Schemes are an effective way to reward employees with equity ownership while ensuring their interests are aligned with the long-term success of the business. These schemes encourage retention and offer tax advantages, but also require careful structuring and compliance.

If you are considering setting up an employee incentive scheme or have been invited to participate in one and require legal support, please contact Chelsey Heaney or a member of the Power Law team.

In the next article, we will explore Growth Shares, another method to incentivise employees, where rewards are contingent upon future company performance.

[1] The Key Employee Engagement Programme (KEEP) and Employee Incentive Schemes Series: Share Option Schemes (Including SAYE)