A good company makes sure that its employees are motivated and want to continue as employees of the company - motivated employees are one of the company’s most valuable assets. A company can affect its personnel’s motivation with various incentive systems aimed at personnel or key employees. A well-planned incentive system motivates and commits employees to contribute and cooperate to achieve the goals of the entire company.
DIFFERENT INCENTIVE SYSTEMS
There are different forms of reward and incentive systems. Taxation is determined by the type of system chosen. An incentive system can be a monetary compensation (performance reward or bonus), share-based (employee share issue, share awards, employee stock options) or a combination of them (synthetic options). Dividends based on work efforts also have features of an incentive system. In any case, it is always advisable to find out the tax consequences of a particular incentive system in advance. Some key questions to ask when deciding on what kind of an incentive system is the best for your organisation are, for example, whether your employees receive a taxable benefit due to the incentive system, what the amount of the taxable benefit would possibly be and at what time the taxable benefit will be taxed.
Most commonly, especially in share-based incentive systems, the amount of the reward is linked to the development of the company's share value or to some other indicator such as to the growth of turnover or operating profit. In other words, the higher the share value or other indicator, the higher the employee's reward. However, it must be taken into account that at the same time the amount of the employee's taxable income and thus taxes also usually increase. When planning a incentive system, the employee's point of view must also be considered. It is good to inform personnel what joining the system means in practice. Paying residual taxes may not be desirable, even if one gets a benefit.
In addition to income taxation, there is also the questions concerning social insurance contribution that needs to be solved. Social insurance contributions are also commonly referred to as "indirect costs" and these include e.g., employer's and employee's health insurance contributions, pension contributions and unemployment insurance contributions. Social insurance contribution is a subject that raises a lot of questions because the obligation to withhold them depends on the situation and the form of reward included in the incentive system. There is variation, for example, in whether the employer must withhold health insurance contributions and whether the taxable benefit is subject to daily allowance payment, employment pension insurance payment and/or unemployment insurance payment.
WHAT KIND OF EMPLOYEE INCENTIVE SYSTEM IS MOST SUITABLE FOR YOUR COMPANY? HOW CAN WE HELP YOU?
Planning and implementing an incentive system is usually a time-consuming process, and it should be carefully planned from the beginning to avoid pitfalls. For instance, if the company implements a share-based incentive system, it is good for the company's owner to be aware that their ownership of the company will decrease, and that part of the dividends may be distributed to the employees in the future.
We have several years of extensive experience in taxation, company valuation and accounting, and our expert team is happy to help your company in building a suitable incentive system from the planning stage to possible tax disputes.
After building a suitable incentive system, we highly recommend updating or drawing up a shareholders’ agreement.