How a Stock Options Plan Works

Would you like to boost your company’s growth and find a formula to retain your most talented employees? Then we invite you to consider implementing a Stock Options plan.

In this article, you will discover what this method consists of and what benefits it brings to your business and your employees. You will also learn how it is managed from a tax point of view and what tax benefits are available to you.

What is a Stock Options plan?

This method consists of offering a company’s employees an incentive remuneration, i.e. in addition to their salary. It allows employees to become shareholders of the company they work for.

The beneficiaries will receive a certain number of shares at a fixed price, which will not change for a specific period, usually between 3 and 5 years. At the end of this period, the holder has the right to buy the shares at the previously fixed price.

If the market value of these shares has risen above the original price, the employee can sell them and make a profit. If, on the other hand, the value of the shares has decreased, the employee may refuse to exercise his or her right to purchase.

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How does a Stock Options plan work?

This plan offers employees two different ways to participate in the growth of a company. These are the direct delivery of part of the company’s shares to the employee and the delivery of stock options. Under such schemes, employees become partners in the company.

This method helps to regulate the direct delivery of stock options. While the use of financial derivatives as remuneration is more common in start-ups and those in the technology industry, they are also frequently used by SMEs in a wide variety of sectors.

To implement this plan, you must first raise capital. This step can take place before the delivery of the options or at the moment the employee exercises his or her right by subscribing for shares.

What are the benefits?

As explained above, the employee stock options plan is a supplement to your employees’ salary.

Its implementation often serves as an incentive for the employees of any company, but especially for companies that are in the early stages of their incorporation and therefore have a limited ability to pay.

As the increase in share value depends on the success of the company, employees will be encouraged to perform their duties to the best of their ability and to be actively involved in making decisions that contribute to the growth of the business.

This is a great incentive that promotes a sense of commitment and encourages hard results-oriented work.

In addition, an attractive employee Stock Options plan enhances the company’s ability to retain its most talented employees.

Taxation of the Stock Options Plan

Whenever an employee exercises his or her right to buy shares, the proceeds will be subject to taxation. In other words, the employee will be taxed on the difference between the market value of his shares and the amount he paid for them, also known as the exercise price.

The amount of the remuneration in kind is the basis for calculating the amount you will have to pay in tax. However, this amount is subject to a maximum annual exemption of €12,000 provided the recipient meets these 3 requirements:

  1. There should be a level playing field for all employees of the company or group of companies. As an exception to this condition, the company has the possibility to set a minimum length of service for an employee to qualify for a remuneration scheme.
  2. No employee, together with his or her spouse and first and second-degree relatives, shall hold more than 5% of the shares of the company to which he or she belongs.
  3. The shares must be held for a minimum period of 3 years from the time of execution.

However, there is also the possibility of obtaining a 30% reduction in the full yield, provided that it does not exceed 300,000 euros.

To take advantage of the tax benefits of the Stock Options plan, three conditions must be met. Firstly, payments from the plans must not be made on an annual basis.

Secondly, more than two years must elapse between the grant and the exercise of this benefit. And thirdly, the payment must not be made in instalments.


Therefore, if you want to gain the trust and loyalty of your employees and improve your company’s short and long-term prospects for success, seriously consider implementing a Stock Options plan.

If you have any questions about the Stock Options plan, please contact our tax advisors in Barcelona by phone or email.

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