Offering just a good salary is no longer sufficient in the ‘war-on-talent’.
Participation structures are a common form of reward for employees, regardless of the stage of the company. From startups and scale-ups to listed companies, participation structures are implemented everywhere. Additionally, participation structures can also be structured at various levels of the organization. It is possible to structure participation only for management and key employees, for the entire staff of the company, or a combination of the two, with differences between the two participation structures.
Structuring a participation structure has several advantages. Firstly, it offers companies an efficient way to attract and retain employees, which is crucial in today’s labor market scarcity. In certain cases, a certain commitment is required from employees, such as an investment, which further bonds the employees with the company. This allows aligning the interests of shareholders, the company’s management, and employees (alignment of interest). Lastly, it motivates employees to contribute to the company’s objectives, as they can also benefit (financially) from them.
An important reason that participation structures have gained popularity in recent years is that they have proven to be an effective way to attract and retain employees in this tight labor market. The ‘war-on-talent’ means that offering only a salary is no longer enough to attract talented personnel. This is especially true for the millennial generation: millennials want to feel they can grow with a company, in part by participating in the company.
Employee or management participations come in many different forms, such as share participations (with or without voting rights), stock options, an annual (discretionary) bonus, or stock appreciation rights. The various participation structures each have advantages and disadvantages and vary in complexity of implementation. Additionally, the tax aspects for the company and employees vary per participation structure. For example, an annual (discretionary) bonus is relatively easy to set up, but the bonus qualifies as employment income and is therefore less favorably taxed than dividends or capital gains received by an employee on shares. On the other hand, share participations are often more complex to implement. In practice, share participations are often structured for management, as there is a desire for managers to invest in the company.
With share participations, managers and employees hold in principle both a profit right and voting rights. If it is not desirable for the company and shareholders that the managers and employees have voting rights or to participate in shareholder meetings, the shares can be structured through a Dutch foundation (in Dutch: stichting administratiekantoor or STAK). By doing so, the shares in the company will be held by the foundation, which will issue a depositary receipt to the participants for each share it holds. The depositary receipts entitle the participants to the full economic ownership of the underlying shares. However, the legal ownership of the underlying shares, i.e., the voting right and right to participate in the shareholder meetings, remain at the level of the board of the Dutch foundation. In practice, share participations are typically structured through a Dutch foundation.
In summary, participation structures offer a good way to attract and retain good employees or managers without immediately leading to higher wage costs. It is important that participation structures are well-structured and aligned with the needs of shareholders, the company, and employees or managers.
VanLoman is the one-stop-shop for advice on employee and management participations and their implementation within your company, whereby VanLoman could assist throughout the entire process.
VanLoman works with a fixed circle of lawyers, notaries, corporate finance advisors so you do not have to engage them separately. With our trusted advisors, VanLoman ensures that the participation of your employees and/or managers is implemented correctly from an administrative, labor law, notarial, and tax perspective. VanLoman works with a well-defined action plan and a fixed price, so you will not be faced with unpleasant surprises afterwards.
We can provide an online presentation, outlining all choices regarding employee and management participations in a clear manner. We assist you and your company to make the right choices and ensure thorough implementation.
If you would like to learn more about employee and management participations, please feel free to call me at +31 (0)6 8320 9914.
Marc Oostenbroek is a partner at VanLoman and has extensive experience in setting up employee and management participations for both domestic and foreign companies. Marc is an external PhD candidate at Vrije Universiteit Amsterdam, focusing on management participations and the beneficial interest regime. His thesis is titled: “The national and international tax aspects of the lucrative interest regime.” Marc specializes in the tax aspects of mergers and acquisitions, fund structuring, and setting up employee and management participations. With his extensive experience, Marc frequently advises clients on employee and management participations, share plans, stock option plans, Long Term Incentive Plans, and so-called lucrative interest structures (carried interest structures).
