IRELAND April 2001

The Government continues to introduce tax supportive legislation for new forms of Employee Share Ownership to encourage their development. Unions and employee representatives have formally welcomed these Schemes as a form of financial involvement and a support to Partnership initiatives at the enterprise level.

At the same time amongst the general workforce there is an increased level of interest in share ownership fuelled by recent buoyant economic performance and the demutualisation of some financial institutions. This new literacy has been highlighted with the flotation of Telecom Eireann (now eircom plc) where significant proportions of the Irish population subscribed for shares and have held them.

The strongest impetus has been the interest companies have shown in expanding forms of employee share participation. In a tightening labour market companies have seen this as a method of differentiating themselves from competitors and attracting and retaining staff. In addition, companies view it as a method by which they can align the employees’ interest and that of the company and contribute to the company’s success. Research from North America strongly suggests that companies with shares held by employees, outperform companies where the employees do not have a stakeholding. Companies are also looking at share schemes as being a platform to support cultural change, greater communication and the development of more partnership based employee relations.

It is in this context that I detail the various forms of Profit Sharing in Ireland.

APPROVED PROFIT SHARING SCHEME (including Salary Foregone and Buy-one Get-one-free Schemes)

An approved profit sharing scheme (“APSS”) is an all-employee share scheme which provides a tax efficient method of offering shares in an employing company to employees. As with other all-employee share schemes, the aim is to encourage share ownership at all levels within a company and for the employees to identify with the interests of the company’s shareholders.

Under an APSS there must be an employer contribution to the scheme. This must be available to all eligible employees on similar terms. Generally employees will have the option to take the profit share in cash, subject to deductions for PAYE and PRSI or taking it in the form of shares through the APSS in a tax efficient manner. An additional facility may be incorporated which permit employees to effectively top up the employer’s contribution by way of salary foregone. Employees may choose to forego an amount of gross basic salary towards the acquisition of shares under the scheme. The employee contribution by way of salary foregone may not exceed the level of employer contribution taken in the form of shares, or 7.5% of basic salary if less.

It is also possible to design an APSS so that an element of the scheme requires employees to purchase shares in which case matching (free) awards will be made by the employing company. This is commonly referred to as a “buy one get one free” (or “BOGOF”) arrangement. The difference from the salary foregone facility is that the employer contribution is contingent on the employee first committing to acquire shares against which the employer will then offer free shares on at least a one for one matching basis. The employee contribution under a BOGOF arrangement comes from after tax income and thus is not as tax effective for the employee.

SAVE AS YOU EARN SCHEME

A save as you earn scheme (“SAYE”) is an all-employee share scheme which provides a mechanism for employees to acquire shares in their employing company. As with other all-employee share schemes, the aim is to encourage share ownership at all levels within a company and for the employees to identify with the interests of the company’s shareholders.

An SAYE scheme combines a savings scheme with an approved share option scheme. The savings element is operated by a savings institution. The total amount saved over a period is used to fund an option exercise. A scheme may be set up by a single company for its employees or by a group of companies for the employees in some or all group companies.

The maximum aggregate amount, which may be saved by an employee under all approved savings contracts, cannot exceed £250 per month. Savings can be for a three, five or seven year period.

At the end of the savings period the employees may exercise their options within six months. No income tax is payable on the grant or exercise of an option provided the scheme has been approved by the Revenue Commissioners.

RESTRICTED STOCK PLAN

A restricted stock plan is a form of share scheme, which may be used as either an executive plan or an all-employee plan. If the scheme is an executive incentive plan then it is likely to include some performance criteria, which must be satisfied before full ownership vests at the end of the restricted period.

Under these plans employees are awarded a future interest in shares, which is subject to certain restrictions. The shares are granted at a discount or at zero cost. The company and employee enter into an agreement whereby the employee cannot dispose of the shares for a number of years. Typically these restrictions lift after a period of time leaving the employees with full ownership of the shares.

If the employee leaves before the shares are fully vested then they are forfeited.

A tax concession is available to employees who participate in these schemes. This concession is proportionate to the number of years the shares must be held. The maximum reduction on liability to income tax is 55% where the shares are required to be held for a period greater than five years.

EMPLOYEE SHARE OWNERSHIP TRUST

An employee share ownership trust (ESOT) is used as a mechanism whereby shares can be acquired by the trustees of the trust and allocated to employees of the company over staged periods. The trust purchases shares in the Employer Company and the ESOT may borrow money to purchase the shares or may receive cash or shares as a gift. The shares are allocated to participating employees over a period of up to twenty years. Shares must be ordinary shares, fully paid up and not redeemable. All employees in the company must be eligible to participate on equal terms.

The majority of the trustees must be representative of the employees and those who represent employees must be selected by a majority of the employees. There must be at least three trustees and all must be resident in Ireland. Corporate trustees may be appointed.

While still relatively small in Ireland the Government is keen that it is on the agenda for future discussion in relation to the Programme for Prosperity and Fairness. It is expected that it will be a matter for debate during the dialogue which will accompany submissions for our next budget by employers and trade unions.

Gainsharing can best be defined as a means of rewarding employees for exceptional performance above a pre-determined target based on sharing financial gains. A single measurement may be chosen or alternatively separate targets in such areas as quality, productivity, cost, and customer service may be identified. The key words in this definition are exceptional performance and pre-determined target. It can be argued that APSS’s,ESOP’s, and SAYE schemes are all forms of Gainsharing but the objectives of introducing a Gainsharing scheme are:-

· Encourage all employees to work closely with management to continually improve performance targets

· Provide a mechanism through which employees can share in the savings generated

· Enable all employees to identify how they can impact directly on movements in key performance targets

While Gainsharing is not universally beneficial, it may be appropriate in certain circumstances. There is no such thing as a standard Gainsharing plan which can be introduced into every organisation. It is essential that the choice of Gainsharing as a reward option is taken having considered the full range of options available. Furthermore the choice of scheme must be based on the particular needs and circumstances of each enterprise.

A new tax regime was introduced in our last budget and changes to previous legislation include:-

· The plan must be open to all employees on similar terms

· At least 70% of the options must be available to all employees on similar terms, but up to 30% of the options may be made available to “key employee(s)” on a discretionary basis

· Capital gains tax treatment applies on the sale of the stock – currently 20%

· The stock must not be sold within three years from the date of grant

A further extension of share ownership was the introduction of a new savings scheme that is an innovative measure to encourage substantial , regular saving among the population in general. This will come into force on May 1 next. It will be assisted by a top up to net savings of 25% out of tax revenue by the State (equivalent to tax credit of 20%). Savers must save for five years and the scheme will be open for one year. Principal features of this scheme are:-

· Accounts can comprise of simple deposit investment, quoted shares, government securities or life insurance products

· Individuals (only those with Personal Public Service Numbers) save between £10 and £200 per month for five years

· Government tops up amount invested by 25%

· Equivalent to tax credit on income of 20%

· Account transferable

Naturally there is strong interest from Financial Institutions in the scheme and many products are currently being introduced.

With the Government and Trade Unions committed to Employee Participation consideration must now be given to the introduction of legislation to allow employees in Private Companies participate in share ownership. While some companies are reluctant to disclose their financial position to their employees a cash payment could be made to employees and this sum could be invested in either Bonds or Unit Trusts and held for the statutory three year period. The Bonds or Unit Trusts could be managed by our National Treasury Management Agency and would be available for all private companies. The subject is currently being considered by the Irish Profit Sharing Association and we propose to include recommendations in our Budget Submission on which we are currently working.

In conclusion it is fair to say that Ireland is in the unique position of having Government, Trade Unions, Employers and Revenue working together to ensure employee Share Ownership is available to all our vibrant workforce. This was reinforced when all were involved in Road Shows for the introduction of SAYE Schemes in Ireland.

EMPLOYEE SHARE OWNERSHIP IN IRELAND

RESTRICTED STOCK PLAN

EMPLOYEE SHARE OWNERSHIP TRUST

STOCK OPTIONS

SAVINGS SCHEME

FUTURE