Share-based incentive plans are long-term mechanisms that allow employees to participate in the valuation of the company according to previously established criteria. As a rule, implementing these plans results in greater alignment of interests between employees and the company, which helps retain talent, boosts workforce performance and, consequently, business performance, and indirectly leads to company valuation.
Among the stock-based incentives, in addition to stockoptions plans, which were already discussed in a prior article, it is worth mentioning restricted stocks and/or stock units (commonly called RSUs), restricted shares, phantom shares, and phantom stock options.
Each of these incentives has specific characteristics that may be more or less appropriate for the timing and situation of each startup. The definition of which incentive best fits the reality and daily life of a startup depends precisely on an analysis of these characteristics. There is no correct formula, much less a recipe that fits for all companies. We shall review each of these incentives below.
Restricted stock or restricted stock unit plans consist of a commitment to issue or transfer shares (or units, as the case may be) to the beneficiary, provided that certain conditions are met, especially maintenance of the employment relationship during the vesting period. Once all these conditions are met, the shares (or units, as the case may be) are transferred to the beneficiary employees.
As the transfer is free of charge, the majority understanding is that this type of incentive is remunerative in nature. By virtue of this, the value of the shares or units, on the date of transfer, must be considered for the payment of labor and social security charges by the company and income tax by the employees.
Performance share plans consist of a commitment to issue or transfer shares on behalf of the employee, provided that certain performance conditions (individual, group, or corporate) are met and the employment relationship is maintained throughout the vesting period.
The nature of these plans follows the same logic as RSUs. Since the shares are transferred free of charge and the delivery of the shares is directly or indirectly dependent on employee performance, the majority understanding is that this type of incentive is also remunerative in nature for labor, social security, and tax purposes.
Both in the RSUs and in the performance shares plans, there is an effective transfer of shares to the beneficiaries, who, therefore, become partners of the company at the end of the plan vesting period. Once partners, these beneficiaries are entitled to vote and to receive any dividends that may be distributed. The rights and payments arising from the status of shareholder, however, are not to be confused with the employment relationship (that is to say, just because an employee has become a partner does not mean that the employee loses an employment link with the company). In any case, dividends are not included in employee compensation for any purpose.
The phantom shares plans, in turn, allows the granting of “virtual” shares that guarantee to beneficiaries the right to a cash payment in the future equivalent to the value of one share multiplied by the number of virtual shares granted, provided that the employment relationship is maintained throughout vesting period.
Technically, this payment is a kind of adjusted bonus linked to the value of the shares. Thus, it is also remunerative in nature and, therefore, makes up the compensation of beneficiaries for labor, social security, and tax purposes.
Phantom stock options plans, finally, combine two incentives already discussed, stock options and phantom shares. Phantom stock options are “virtual” stock options. Through this incentive, if the beneficiary elects to exercise the virtual options after the vesting period, the company will make a cash payment to the beneficiary equivalent to the difference between the exercise price of the virtual options and the value of one share of the company, multiplied by the number of virtual options exercised.
As with phantom shares, this payment is a kind of agreed-upon bonus linked to the appreciation of shares during the vesting period. If the share appreciates, the employee shall be entitled to receive an amount to be paid by the company. Similarly, this payment is also remunerative in nature.
In both phantom share and phantom stock option plans there is no actual transfer of shares to beneficiaries, but only cash payments. These plans therefore do not allow employees to become partners of the companies, which is why they differ from RSUs and performance share plans.
Although all the incentives discussed here are included in employee compensation, each has its own peculiarities and may be more or less recommendable depending on the timing of each startup. Mistaken definitions of the characteristics of the plans may create considerable liabilities, causing financial impacts, and even alienating investors. The choice of incentive and its mode of implementation and treatment are therefore essential and should be done with caution.
 However, there are already decisions to the contrary: Application for Mandamus No. 5002951-79.2017.4.03.6105.