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In recent years, German SMEs have had a huge problem: attracting new employees. It is even more difficult to attract skilled workers if you cannot pay high salaries. Nevertheless, you have the opportunity to attract top trained specialists - namely with employee share ownership.
Employee share ownership means that you give your employees a share in the success of the company. Often this is done as compensation for a lower salary. Such employee participation must be contractually defined. You have a choice of programs, such as a VSOP participation or participation under share options in an ESOP. In this guide, we explain what these abbreviations mean and go into detail about what employee share ownership is and what you should look out for.
The concept of employee share ownership is generally understood to mean the participation of employees in a company's success in material form. There are various forms of employee share ownership. All of them have the overriding objective of allowing employees to participate in the company's profits or in its increase in value. The reasons for introducing employee share ownership can be many and varied.
In the case of employee share ownership in a startup, the introduction can make sense because the young company is not yet able to pay huge salaries but still does not want to do without top-qualified specialists. In the case of an employee participation GmbH, the focus is usually on incentivizing, motivating and increasing employee satisfaction and loyalty to the company.
Long-established companies, on the other hand, benefit from an employee participation GmbH in the form of better work performance and closer employee loyalty to the company. Ideally, a participation program should be a win-win situation for both sides, with both the employer and the employee benefiting. You can choose from a number of different variants. A basic distinction is made between:
While a real employee stock ownership program means a real participation in the company, for example in the form of shares or stock options, a virtual employee stock ownership program only allows an indirect participation in the company.
1. real direct employee participation
Direct employee participation is the classic and gives the employee a real stake in the company. The employee is given the opportunity to become a shareholder in the company. This is easy, for example, with a stock corporation that is listed on the stock exchange. Here, shares or stock options are issued. However, since many medium-sized companies tend to be corporate legal forms such as limited liability companies or related models, shares are not typically issued here. However, it is still possible to give employees a share in the company.
There are various ways of structuring this. Such participation often takes the form of an ESOP (Employee Stock Option Plan). In this case, the company issues shares in the share capital, which in the case of a GmbH is at least 25,000 euros. Under an ESOP, the employee could receive shares of up to five percent of this sum in the form of an employee stock option, for example. A classic ESOP contract specifies what percentage of the share capital can be acquired at what time and under what conditions.
In Germany, however, direct employee participation in a company in the form of real shares or share options involves a great deal of effort, such as the notarization of the transfer of the company shares, and further bureaucratic hurdles. These must be taken into account in order to avoid additional tax burdens, for example. For these reasons, it makes sense to consider alternatives such as virtual employee shareholdings.
2. Virtual shareholding
A virtual employee shareholding (VSOP) is similar to a direct one, but has elementary differences. As the name suggests, employees do not receive real shares, but virtual ones. Nevertheless, this gives them the opportunity to participate in the success of the company. Moreover, employees do not become shareholders. Strictly speaking, these are contracts under the law of obligations that are concluded between the employer and the employee.
The Virtual Stock Option Plan works in a similar way to an ESOP. However, there is no real equity participation for employees, only an entitlement to virtual company shares. With Virtual Stocks, the employer regulates the conditions under which it grants what amount of shares to its employees and what payments they receive. Possible options are:
The elementary advantages of virtual participation (VSOP or also VESOP) compared to real participation (ESOP) are
In this article, we address the difference between real and virtual shareholdings.
3. other employee participation Examples of employee recruitment
In addition to the options described above, there are other options which are much less common but which we would like to mention for the sake of completeness:
Employee recruitment as an acute problem in SMEs
German SMEs are increasingly suffering from the progressive shortage of personnel in all areas. Employees are in a good position vis-à-vis employers and can usually choose from a wide variety of offers. While headhunters used to look exclusively for highly paid specialists for management positions, they now search for employees in all sectors - even unskilled workers are sought in this way.
The reason: nowadays, employees can often choose where and under what conditions they work. If the working atmosphere is not right, if too much overtime is demanded, or if there is no attractive salary, they switch to another industry where working hours are regulated and it is possible to earn more.
Fear of unemployment is no longer a decisive reason for holding on to a job or a company. For this reason, employers need to score points with other benefits, such as flexible working hours, company childcare, affordable housing, a home office or employee share ownership. Gradually, the baby boomers are retiring and experts estimate that there will be around 7 million fewer workers in Germany by 2035.
If the population shrinks, fewer jobs will be needed in some areas, but the acute labor shortage will hit the middle classes particularly hard. In the past, economic growth was achieved by expanding employment in the German economy - this is no longer possible. Even if the shortage of skilled workers does not affect all sectors and regions in Germany, there is an urgent need for action in some sectors.
After all, Germany's SMEs need a strong base of skilled workers in order to secure their business location sustainably and in the long term. Companies are therefore under pressure and the battle for talent is becoming more intense. If you want to attract new employees, you have to fight for them and create incentives.
In times of a shortage of skilled workers, employee retention and recruitment are more important than ever before. You should therefore position yourself as an interesting employer. One way of doing this is employee profit-sharing, which makes you attractive in the long term. Retaining qualified employees in their own company and recruiting employees is a major challenge for many companies. At the same time, the shortage of skilled workers is slowing down the development of companies and the lack of capable employees is noticeable in many economic sectors.
Therefore, employers must offer advantages and positively differentiate themselves from the competition in order to attract experienced employees and retain them in the long term. Employee stock ownership programs are an efficient means of retaining employees and counteracting the shortage of skilled workers. Such programs have long been standard practice abroad, and interest in them is growing in Germany as well.
Involving employees in your company in the form of benefits has become elementarily important in order to remain competitive in the labor market in the future. For these reasons, you should take a look at the different options and variants of employee participation to find the model that suits you personally.
The models all differ from one another, also in terms of the incentive for employees. In addition, the tax treatment is important for employee participation. Not all models are recommended for every company. Furthermore, there are employee participation models that are relatively simple and inexpensive to implement and offer real incentives for employees.
For the company itself, employee shareholdings have numerous advantages. These include, for example:
There are also various advantages from the employees' point of view. These include a right to a say and a right to information. At the same time, your employees bear greater responsibility and have more freedom to make decisions in their areas of responsibility. Financial participation in the company gives employees the opportunity to earn a higher income. At the same time, employees with a high level of responsibility identify more strongly with their employer. This leads to increased productivity and better motivation. Satisfaction with the employer and the area of responsibility is also increased.
To successfully integrate an employee participation program into your company, you need a strategy. Numerous questions arise not only in the course of implementation, but already during research. For example, what about taxation? Is employee stock ownership tax-free? Where does the sale of employee stock need to be reported on the tax return? Is there a VSOP model contract or a phantom stock model contract?
As a first step, it is advisable to find out whether there is any interest at all in employee share ownership on the part of the workforce. Therefore, you should conduct a corresponding survey. In addition, you must observe legal regulations for employee participation programs. Similarly, your individual circumstances must be taken into account.
You must avoid any tax or social security disadvantages arising from employee participation. Furthermore, the design options vary and require a great deal of research in advance. A dominant topic is, of course, the taxation of employee participation.
Depending on the participation, the employee is then not only in an employment relationship, but is also a shareholder at the same time. You therefore need to clarify what happens in the event of a sale. It therefore makes sense to leave the implementation, starting with the planning of your project, through the contracts and up to the implementation, to experienced experts.
Of course, employee profit-sharing alone cannot completely counteract the shortage of skilled workers - but it can make it easier and faster to recruit new employees and retain existing top talent in your company. There are various legal requirements that need to be observed when it comes to employee stock ownership plans. In addition, you must of course take your individual wishes and circumstances into account.
If you disregard important aspects, this will have consequences under social security and tax law. It is therefore best to leave the implementation and planning to experts. We will be happy to advise you if you have a fundamental interest in the topic of employee participation.
Disclaimer: The contents of the information offered at esop-direkt.de do not constitute legal advice. If you require a legal review of your individual case, please contact our specialized team: beratung@esop-direkt.de
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