Do you have employees who have received shares and, then, have been disappointed in the fact that they need to pay tax on the benefit? From our experience, we know that many companies having share-based incentive programs have found that the participations in the programs have been disappointed with the results. This can, to some degree, be due to the fact that they have not understood that the benefit is going to be taxed and/or they have also not known when such tax is to be paid.
Unexpected tax can create disappointment
When an employee receives shares from its employer free of charge, this is a taxable benefit which is taxed as employment income. When the employee receives the benefit, the employer is required to deduct the tax charged on the benefit from the employee’s salary paid out during the same month as the month in which the benefit is received. If the value of the benefit is sufficiently large, the paid out cash salary can be zero. If this is a surprise for the employee, it can, of course, create frustration and financial problems. Further disappoint can arise later when the benefit is reported in the employee’s income return and any remaining tax due (in other words, the tax amount in question actually exceeded the amount of salary to be paid in the month in which the benefit was received) is charged to the employee. In addition, a negative surprise can take place when a possible sale of the shares is declared at a later point in time in the tax return of the employee and he or she discovers that they must, in addition, pay tax on any gains on the shares.
Communication is important
It is usual that a company invests considerable sums in producing and issuing various types of share-based incentive programs, for example, through share savings plans or performance shares. In conjunction with participating in a program, employees often receive information regarding how the program works, under what terms they can receive shares free of charge and how this benefit is taxed. Sometimes, this is the only information which the participants in the program receive. A number of years later, often between three and five years, the incentive plan shares are issued. At this point in time, the information provided when the program was initiated has often been forgotten. In addition, it can take time to convert a benefit in the form of shares into cash. The frustration experienced by the employee can, in the worst case, negate all of the positive value and effects originally intended to be produced by the incentive program.
A lot of that which is described above can be counter-acted by the employer communicating about the plan in an effective manner so that the participants understand what will happen and they can handle the economic effects of their participation in the plan.
Here are some tips for better communication regarding incentive programs:
- Provide information prior to each event and not only in conjunction with the initiation of the program.
- Provide information as to what will happen in close connection with the actual event, for example, prior to the incentive plan shares being issued and, subsequently, when the tax is deducted from the employee’s salary.
- Provide the employee with the opportunity to present questions to an individual in the company who can explain the practical details of the chain of events inherent in the plan.
By ensuring that the participants in the incentive program are kept informed, the premises are improved in terms of the employees appreciating the value of the benefit in the right manner.
Contact us if you want to receive more information on how to communicate with employees regarding your incentive program!
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