Establishing an Effective Employee Participation Plan

By implementing an Employee Stock Ownership Plan (ESOP), you involve employees in the company's capital. The options encompass a variety of different variations. Before we delve into implementation, let's take a brief look.

The central form of unreal employee participation is the Virtual Share Program (VSP). Compared to other models, it is less complex and easier to introduce. In this model, employees receive Phantom Stocks, whose real payout occurs at a future predetermined time.

True employee participations are applied in these options:

• Silent Partnership: The employee receives a partial share of the company's profit after depositing a contribution. They are only liable for their deposit, never with their assets. However, they have no voting rights.
• Employee Shares: In this form of direct participation, the employee has the option to purchase company shares and receive dividends. The theoretical voting rights are usually contractually excluded.
• Allocation of Shares: This represents a participation option for limited liability companies. The employee can acquire company shares and become a co-shareholder.
• Employee Savings: This is a form of special payment that is credited and paid out at a later date.
• Participation Certificates: Employees receive a share of profits in this case. However, they do not become legal partners. A five-year lock-up period is required.
• Employee Loan: The employee becomes the personal lender in this case. In return, they receive a fixed interest rate over the specified term. The loan is secured by a bank guarantee against the insolvency of the company.
• Debenture: In this case, the employee purchases certificates from the employer. The amount, including interest, is paid out by the employer at the end of the term.

Legal Basis of Employee Participation

Since Switzerland generally allows freedom of contract, you have considerable flexibility in designing your employee participation model. However, what makes implementation complex is the fact that multiple laws are involved in the background. The following must be considered:

• Labor Law
• Tax Law
• Social Security Law
• Corporate Law
• Accounting Law

Implementation

Once the decision for a specific participation model has been made after careful consideration, it is time for implementation. Below, we have compiled eight useful tips for this purpose.

1. Take Your Time

This is a simple tip but nonetheless helpful. The employee participation agreement is legally binding for many years and should be professionally crafted accordingly. Familiarize yourself intensively with all legal details and contractual risk minimization beforehand. This will pay off later. In any case, the document should be tailored individually to your company.

2. Consider Labor Law Considerations

In particular, it is important to discuss to what extent the chosen participation model directly affects the employment contracts of your employees. In many cases, these contracts may need to be adjusted accordingly. Especially when employees become direct shareholders, notarial certification may be required. Also, the billing modalities and mandatory information in salary information may change.

3. Clarify the Taxation Question

For employees, it makes a big difference whether the payout is classified as commercial or capital income, or as a bonus added to their salary. Also, the timing of profit distribution is a tax-relevant basis of assessment to be considered. This can change the conditions for taxation.

4. Consider Social Security-Relevant Points

Social security regulations must also be taken into account. In some cases, there may be the possibility to account for financial profit distributions without social security contributions. However, they often have to be treated as part of the social security taxable salary.

5. Determine the Source of the Shares

An important consideration, which could also be a decision criterion for one of the models, is from which source the shares for employee participation should be provided. One option is from the company's own shares. Alternatively, a stock buyback from investors or a capital increase could be considered.

6. Set a Fixed Stock Value

A fixed formula in valuation, both for purchase and sale, is recommended. This is for income tax reasons. Under certain circumstances, only a partial sum of the proceeds may be tax-free.

7. Secure Clear Rights in Dealing with Stocks

Especially, but not exclusively, relevant for the Phantom Stocks model, are the following questions: What rights do you want to grant employees regarding the stocks? Should they also be allowed to sell them? If so, should the sale be limited to their colleagues, or do you allow a sale to external third parties? How do you deal with a loss in stock value? What should happen if the employee is terminated? Is the Vesting model within Phantom Stocks the right solution for you? You should establish clear answers and rules for these and other points.

8. Do Not Overlook Important Side Aspects

This includes considerations such as how the company must account for financial revenues through employee participation within the desired model. Depending on whether it is debt or equity capital, this can affect the company's creditworthiness, among other things.

Information Sessions for Employees

Despite all the initiative in developing a professional plan, it is important not to forget that many employees may not yet have the necessary background knowledge in the world of bonuses and stocks. Therefore, it is important to engage them through information sessions to inform them about future opportunities. Advantages and potential risks must be transparently communicated.

No One-Size-Fits-All Solution and Support Options

At this point, we must unfortunately disappoint you - we cannot offer you the one patent solution either. The best participation plan is still one that is individually tailored to your company. And that's the way it should be. In addition to considerations of a social nature, it is particularly important to identify and weigh the resulting advantages and disadvantages in labor and tax law for your company and your employees. However, in one aspect, we can reassure you. Regardless of which model is ultimately chosen, the crucial goal is achieved by entrepreneurs in the vast majority of cases: recognizing and appreciating their employees.

On the way to this goal, there are now a number of highly professional lawyers who, due to high demand, have specialized in the areas of employee participation plans and executive compensation. They offer the full range of services that fall within their specialization. Their repertoire ranges from consulting on various participation models to the creation, design, and review of national and international compensation plans, as well as expert opinions.

If you are interested, we can assist you in finding such a specialist. At GetYourLawyer, we offer you the opportunity to receive a selected range of expert lawyers from your region, tailored to your company and your case, through a free online request.