Share Option Schemes (Including SAYE: Employee Incentive Schemes Series

Article 2 of 4

Introduction

Equity participation can be a powerful incentive for key employees. While KEEP (discussed in the first article of this employee incentive schemes series)[1] offers a specific tax-advantaged framework, many companies choose to implement general share option arrangements tailored to their business needs.

In this second article of the employee incentive schemes series, we explore the standard share option schemes and the Revenue-approved Save As You Earn (SAYE) scheme available to employers in Ireland.

Share Options

The key terms governing the employee option scheme, such as vesting conditions, eligibility, and leaver provisions, which may cover how rights are treated on departure are set out in the share option scheme rules, drafted by the employer. Typically, if an employee leaves under circumstances defined as a “bad leaver” (e.g., dismissal for cause or resignation prior to the exercise date), the scheme rules may provide that the unvested options and sometimes even vested but unexercised options are forfeited, thus incentivising and rewarding continued service. Conversely, “good leavers” (e.g., those leaving due to retirement, redundancy, ill health, or termination without cause) may retain vested options and, in some cases, a pro-rated portion of unvested options, ensuring fair treatment while maintaining the integrity of the scheme.

The company will separately enter into an option agreement with the specific employee whereby the options are granted to the employee, subject to the overarching provisions of the scheme rules. The individual option agreement will include the number of options granted to that employee, the exercise price and the vesting schedule applicable to those specific options.

Because a share option is just that—an option—the employee is not obliged to exercise it. If they choose not to do so, the option may simply lapse. Where an employee leaves the company before their options have vested, those unvested options will typically be forfeited and revert to the company, depending on the rules of the scheme.

The tax treatment of any gain realised on the exercise of a share option depends on whether the option is classified as a “short option” or a “long option”. A short option is one that must be exercised within seven years of the grant date, whereas a long option may be exercised more than seven years after the grant date. [2]

Revenue-approved Save As You Earn (SAYE) Scheme

Alternatively, companies can opt to implement a Revenue approved share option scheme, known as Save As You Earn (SAYE). SAYE can be more tax efficient for the employees, as they may qualify for tax relief on the exercise of their options, provided that they fulfil certain criteria, e.g the options are not exercised within 3 years of the grant date. The employee’s participation in SAYE is linked to a formal savings contract between the employee participants and an approved a third-party bank or savings institution.

While the SAYE scheme is an attractive prospect for the employee, the employer has less flexibility to structure the scheme, as the scheme must strictly conform to Revenue’s criteria and relies on the participation and involvement of third-party financial institutions. Employers must therefore consider which share option structure best suits their business needs, taking into account tax treatment, flexibility, and ongoing compliance obligations.

Conclusion

Share option schemes offer significant flexibility and can be tailored to a company’s commercial strategy. However, tax treatment and compliance obligations vary depending on structure.

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 of this series, I examine Restricted (Clogged) Share Schemes— structures that grant employees shares from the outset, but subject to important restrictions or performance hurdles.

[1] Employee Incentive Schemes Series: The Key Employee Engagement Programme (KEEP)

[2] Unapproved share option schemes