Practical challenges in implementing a successful equity incentive plan in Singapore

There are cogent reasons why organisations should establish an equity incentive plan or scheme to achieve its aims of attracting, retaining and rewarding its employees and contractors. In theory, it is an effective method to align the objectives of employees with those of the organisation, and has an added benefit of being a cost efficient way to augment the remuneration packages of senior employees and new hires. However, less discussed are the practical difficulties to establish a successful equity incentive plan, and in this article, we will discuss some of the common issues that a Singapore-based company may encounter.

Difficulties in administering the incentive plan

For large multinational conglomerates or publicly-listed companies, a remuneration committee of directors or senior management usually oversees the remuneration schemes, including equity incentive plans, of the organisation. Such committees often comprises seasoned professionals who are familiar with equity reward schemes, and comfortable in making decisions relating to such schemes. However, smaller private companies which are running on a much leaner scale may not have sufficient manpower to monitor and operate an equity incentive scheme effectively, and may also suffer from a lack of expertise at the management level. This will likely culminate in poorer decisions being made and a poorer outcome for all stakeholders of the scheme.

In addition, it is common for well-funded companies to engage external professionals or hire an experienced scheme administrator to perform administrative tasks including preparing corporate documents, making filings with government authorities, or keeping track of awards granted under the incentive plans. On the other hand, private companies that do not enjoy the same level of resources may instead rely on inexperienced staff who have to juggle the additional responsibilities that come with the administration of the incentive schemes with their day to day work responsibilities. For an incentive scheme to succeed in achieving its objectives, it is vitally important that the incentive rules are properly administered and followed, so as to retain the trust and confidence of the recipients of the awards.

Complex plan rules

For private companies in Singapore, there are little specific regulations or restrictions on the terms of the incentive plan rules, save for certain provisions relating to the issuance or buy back of shares. Given the regulatory flexibility, companies may decide to include innovative provisions or provisions that were lifted from incentive plans used in other jurisdictions which were only included to satisfy the regulatory requirements of that jurisdiction.

Unfortunately, if such terms are not well drafted or tailored to comply with Singapore law, it may cause confusion in interpretation and could negatively impact upon the motivation of employees and / or contractors.

Imbalance of power for plan managers

It is also common for companies to reserve certain powers or discretion to the incentive plan managers so as to allow the company to have the flexibility to make amendments to the incentive plan rules where there are changes in the circumstances of the company. However, it is a delicate balancing act to ensure that the company retain sufficient power to make reasonable amendments where warranted, while keeping in mind that recipients of the awards may feel alienated if their award grants or performance targets are regularly subject to change, no matter how reasonable the changes are. Since the scheme is usually overseen by the senior management of the company, recipients of awards granted under such incentive plans may, with good reason, have reservations on whether their plan managers would favour the interests of the company before the award holders. Given the growing demands on employers to act ethically and responsibly, plan managers will need to take care to ensure that any decision in relation to the equity incentive plans is taken with the interests of employees at its core. It is also inappropriate for plan managers to abuse their power and “punish” award holders by withholding or cancelling awards without justification.

Failure to consider applicable regulations in other jurisdictions

One of the emerging trends from the global pandemic is that organisations have an increasingly geographically diverse and mobile workforce, especially organisations in the new, technology-enabled industries. It is now possible for such workers to be physically located outside of the jurisdiction of their employer and this presents a formidable challenge to the scheme designers since they will then need to consider the laws of other jurisdictions. Prior to implementation, it is important that the scheme designers have a clear understanding of where the potential recipients of awards would be located so that they can take into consideration the relevant regulatory or tax impact that would be applicable to such awards. In certain circumstances, it may also necessitate a change in the underlying structure of the scheme. For example, if potential recipients are based in China, which has a strict foreign exchange controls regime, granting options for shares in a foreign company may not be feasible for such recipients.

Furthermore, while companies may feel that income tax issues are personal to the employee and do not concern the employer, it is not unusual that many of such compliance requirements actually apply to employers as well. Taking Singapore as an example, employers are required to prepare tax filings for employee earnings and may be required to withhold monies for tax clearance purposes. Companies should ensure that all applicable compliance requirements in respect of the incentive schemes are met.

Key takeaways for businesses

There are a myriad of challenges to implement an equity incentive plan but once the plan is implemented successfully, the rewards can be significant. Many challenges can be overcome by having an experienced team, and by consulting the subject matter experts who are able to anticipate potential issues and provide practical solutions. Regardless of the size of your organisation, it is also possible to encounter unforeseen problems such as the ones highlighted in this article.

If you are encountering any issues with the structuring and implementation of an equity incentive plan, or would like to have a chat to find out more, please contact our Singapore-based colleague Vincent Tan, working in the offices of JurisAsia LLC with whom Gowling WLG has an exclusive association.

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Vincent is a corporate lawyer specialising in mergers and acquisitions, cross border investments, and other general corporate and commercial matters.

Posted by Vincent Tan

Vincent is a corporate lawyer specialising in mergers and acquisitions, cross border investments, and other general corporate and commercial matters.