Growth companies press for share options reform

Thirty million new jobs have been created in the US since 1970, compared with fewer than five million in Europe. European unemployment levels are now double the rate in the US. Given that the US model offers conclusive evidence of the role high-growth mid-sized companies play in job creation – 80 per cent of new US jobs sprang from this source – Europe’s governments are becoming increasingly conscious of the need to boost the numbers of high-growth companies.

Growth Plus, the European entrepreneurial companies association formed by the merger of Europe’s 500 and Croissance Plus, recently published a research report which highlights the importance of stock options and employee share ownership programmes (ESOPs) as a potentially powerful weapon in the battle to boost employment levels. Europe’s venture industry has long been aware of the potential benefits of share-based remuneration schemes for certain types of company, a message lobby groups have striven hard to put across to policy makers.

In theory, the attractions of share options for young and growing businesses are clear: they provide a form of remuneration that enables employees to share directly in the success of their company without impacting on cash flow. Thus they are an effective mechanism for the recruitment and retention of high-calibre staff, whose salary expectations a young company might not be able to meet otherwise. Furthermore, stock options are an efficient means of aligning the interests of the employees, the business and its shareholders.

The actual usefulness of stock options and ESOPs, however, is largely dependent on their tax treatment, which varies widely from country to country. Based on the results of its survey, Growth Plus identifies the tax treatment of stock options as a significant inhibitor to European job creation.

The study, which examined a representative selection of Europe’s 500 fastest growing companies, discovered that more than 50 per cent of respondents already have ESOPs, while half the remainder plan to introduce such schemes in the near future.

The companies that had introduced ESOPs in recent years report that they have encountered a number of obstacles, both cultural and political. On the cultural front, the most important obstacles to stock-based remuneration were: that employees were largely ignorant of such schemes, because of their relative rarity; and a negative image of stock options, historically granted mainly to senior managers, which are widely perceived as being open to abuse.

The political obstacles to ESOPs and similar schemes inevitably vary widely from country to country; some markets have no legal or fiscal frameworks for dealing with ESOPs, while in other countries, their treatment is either uncertain’ or punitive’. Broadly, however, taxation problems can be divided into three categories: the timing of payments; the basis and level of taxation; and uncertainty regarding future liabilities. Internationally mobile employees, meanwhile, may find that share options incur the problem of multiple taxation.

Drawing on the experiences of its members, Growth Plus has drawn up a set of legislative recommendations for European governments with a view to promoting a more consistent and ESOP-friendly environment.

Chief among these are: that private as well as listed companies should be permitted to use ESOPs; that gains from share options should be taxed on realisation rather than when shares are granted or the option is exercised; that ESOP awards should not be liable to social charges; and that taxation of ESOPs should be based on the capital gains rather than the income tax system.

Growth Plus also recommends that certain elements of ESOPs should be left to the discretion of shareholders, rather than being directly governed by legislation. Among the issues the association believes should be determined by shareholders are: the number of employees covered by any share option scheme; the overall scale of the scheme; the frequency and length of share awards; the criteria linking performance and award; and the price at which share options should be granted.

Denis Peyre, deputy vice president of Growth Plus, points to the role share options have played in the US market, where – in the context of a benign tax environment – well-capitalised shareholding schemes have been considered as the key to a lasting competitive headstart. In Europe, Peyre says, Europe-wide harmonisation of taxation practices is a prerequisite’ for stock options to become an effective instrument to boost job creation’.