5 ways to reward employees

Five forms of employee participation

• KPI Bonus (STIP (short-term)): The employer agrees with the employee on targets (key performance indicators, KPIs) with a pre-defined financial reward as an incentive to reach those targets. It can be event-based (e.g. a percentage of a transaction) or period-based (e.g. profit per quarter). A KPI bonus can work wonders in an environment where people naturally like to compete and individual performance is easily traced back to revenue or cost reduction. It is a continuous incentive to perform better, and usually new employees can join immediately. In general these are short-term incentives with fast results. This is also often called a short-term incentive plan (STIP).
• Virtual Shares (LTIP (long-term)): The employer mimics the financial workings of shares by granting 'virtual stock units' to employees. These give the right to a payout when a pre-agreed event happens, at which regular shareholders also receive a payment. Usually this is on dividend payout and/or on a sale of the company (stock appreciation rights, SARs). It is a contractual arrangement, part of the employment agreement. No notary involved. Virtual shares are ideal for employees with an entrepreneurial spirit who cannot or do not want to buy shares in the company. You cannot give shares away for free (the tax authority always looks at fair value). Having to buy in is often a barrier, especially when the company represents a significant value. Virtual shares offer a solution. This is also often called a long-term incentive plan (LTIP).
• Stock Options (LTIP (long-term)): Employees get the right to buy shares at a pre-agreed value, regardless of the market value at the moment they exercise the option. The idea is that you then (directly) sell the shares to bank the price difference. This form is mainly suitable when the company is publicly listed. When an option is exercised, Dutch income tax is due on the difference between the pre-agreed price and the market price of a share. That is why an employee can usually only exercise an option if she or he can sell the shares straight away. If a company is not listed, that can be difficult. Non-listed companies are therefore better off choosing virtual shares. The incentive and mechanics are comparable. Options also fall under the LTIP category.
• Depositary Receipts (STAK) (LTIP (long-term)): The company lets employees participate through a specially created foundation (the STAK) that sells depositary receipts of shares and itself is the (legal) owner of the shares. There are two reasons to work with depositary receipts instead of letting employees buy shares directly: (i) employees have no voting or meeting rights in the shareholders' meeting and (ii) joining and leaving is easier because a transfer of receipts does not need a notary. For companies that want many people to participate with real equity, this is a good way. It is especially useful when the shares represent a significant value and the employee therefore has to invest. That creates so-called 'skin in the game'. Depositary receipts also fall under the LTIP category.
• Real Shares (LTIP (long-term)): The employee directly buys shares and becomes a new partner. There are two types: non-voting shares and ordinary shares. If the company has an employee who really makes the difference, also on a strategic level, it is wise to involve them as a full shareholder. This often applies to co-founders, management successors or people in other key positions. With non-voting shares someone cannot vote but still has information rights and can formally exert influence. This form is rarely used because it is tax-inefficient. Shares definitely fall under the LTIP category.