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Option – an effective way to encourage the employee

Option – an effective way to encourage the employee

28/11/2019 Nowadays, vast majority of the employers are facing the problem of retaining professional employees. High salary is not the only mean of encouraging an employee to dedicate themselves to work. In the eyes of the employee, flexible work schedule, home working opportunity, health insurance, free meals at work – the benefits that are no longer surprising. However, employers, especially startups, may not always afford to spend a lot of money and resources on retaining an employee for as long as possible while at the same time earning employee’s loyalty and interest in the company he works for. And because of that there is an “option”.

What is the option?

Option – a transaction that gives the right to buy or sell a certain amount of the company’s assets (securities, currencies, stock market index, interest rates, raw materials and etc.)  a later date at an agreed price.

How is it beneficial for the employee?

Regarding the option as the mean of motivation, this means that the employer grants the employee the right to purchase shares of the company he works for at an agreed price, or to sell existing shares (after the acquisition of shares) at an agreed price. Option as the mean of motivation is beneficial both – for the employee and the employer, especially if the latter is a startup. When an employee acquires company shares, an employee’s loyalty and interest in contributing to the company’s long-term goals gradually increases and simultaneously an employee feels more motivated because he has all the rights guaranteed by law. It is a great opportunity to contribute in the creation of new businesses – a risk that one person might not dare to take. The company’s benefit in this case is also evident – the possibility to attract various specialists while preserving their loyalty, real involvement in activities and motivation is highly ensured.

The options regulations and benefits will soon become much more attractive

Another evident benefit of the option – applicable existing and future tax benefits: 1. Firstly, the Law on the State Social Insurance of the Republic of Lithuania provides for benefit – social insurance contributions shall not be deducted from the income from the exercise of options on shares, provided that the right to the shares is granted to the employees not earlier thran 3 years. 2. Moreover, an amendment to the Law on Personal Income Tax of the Republic of Lithuania has already been adopted and will be carried out in the beginning of 2020. Under this amendment, tax-free income will include employee’s benefit from the option to purchase the share free of charge or at a reduced price, if the shares are acquired not earlier than 3 years after the option was granted. In other words, from the beginning of a new year the benefits from options are not going to be charged by the income tax or the State Social Insurance tax, in the case if shares are acquired not earlier than 3 years after the option was granted. Thus, Lithuanian employers should be interested in exploiting the options, which have already been tested in other countries and are considered to be an effective mean of encouraging employees. And for employee, it is a great opportunity to become a full-fledged shareholder of the company. Law firm ECOVIS ProventusLaw has over 10 years of experience in labor and corporate law consulting, dispute resolution among shareholders, drafting shareholder options. If you are considering taking advantage of option to increase employees’ motivation, do not hesitate and contact us for advice on how to duly implement it.

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