Incentive Schemes in Employment

To attract and retain talent, it is common for employers to offer various incentive schemes on top of regular wages. Such schemes can motivate employees to go the extra mile and foster unity by working toward a shared goal—the company’s value development. Advokatfirmaet Seland | Rödl & Partner AS has experienced lawyers who can assist with designing and implementing incentive programs. This article briefly covers some examples of incentive schemes and includes a few remarks on their tax implications.

1. Bonuses

Bonus plans can be tied to individual goals, company-wide targets—such as increased revenue—or a combination of both. A bonus is typically an annual cash payment in addition to regular wages, and its tax treatment is generally familiar and predictable for both employees and employers.

2. Share Options

An option agreement gives employees the right to buy shares in the company at a future date, at a predetermined price. Granting options in itself typically has no immediate tax consequences for either the employer or the employees. When the options are granted, a price is set for the shares that employees will pay if they exercise their options. The period between grant and exercise is usually two to three years.

Options issued in employment relationships are governed by Section 5-14 of the Norwegian Tax Act (skatteloven). When employees exercise their options, the difference between the market value of the shares and the exercise price is treated as wage income.

In Section 5-14 (2) of the Norwegian Tax Act, there are special rules for options in startup and growth companies, allowing the benefit not to be taxed as wages under certain conditions relating to the company, the employees, and the terms of the option agreement.

3. Synthetic Options

Synthetic options are not explicitly regulated under the Norwegian Tax Act in the same way as traditional options. If you plan to use synthetic options as an incentive model, the tax treatment must be assessed based on the specific arrangement you want to implement.

4. Shares

Employees may also be offered the opportunity to purchase shares directly in the company. If employees buy shares at a price below market value, the discount—i.e., the difference between the price paid and the market value—is taxed as wages. However, if employees pay the full market value, wage taxation is generally not an issue.

It is also possible for employees to buy shares using a combination of cash payment and seller credit provided by the company. Based on case law and statements from the Norwegian Tax Administration, it is crucial that employees take on genuine financial risk if the arrangement is to avoid being classified as a taxable benefit. Factors such as the size of the cash payment and the terms of the seller credit will be important. Any cancellation or write-off of the debt by the company could be considered a benefit to the employee, taxable as wages.

When employees become co-owners of the company, it is also important to have a shareholder agreement that the employees join. This agreement governs the shareholders’ rights and obligations toward each other. For instance, it is common to include a clause requiring employees to sell their shares if they leave the company.

5. Synthetic Shares

For commercial reasons, it may sometimes be relevant to let employees invest in synthetic shares, which derive their value from underlying shares. As long as the employees take on genuine financial risk, the tax treatment of synthetic shares should be the same as for directly held shares. Nonetheless, it is important to assess each specific arrangement.