How shares work

Liam McPoyle

Hi folks.

As part of my wifes remuneration package in her job she was awarded shares last year.

There are performance conditions to the shares which I will outline below.

Neither of us have any knowledge of how the shares work so Im looking for some explanation as to what it actually means!

Performance Conditions

1.The performance period applicable to this award commences on the date of grant and ends on the 3rd anniversary of the date of grant.

2. Total Shareholder Return (TSR) Target:

The award will vest provided the TSR of the company is equal to or greater than the TSR of the comparative companies over the performance period such that

2.1 : 25% of an award shall vest for TSR performance equal to the median TSR of the comparative companies over the performance period.

2.2 : 100% of an award shall vest for TSR performance equal to the 75th percentile or greater (eg in the event that the upper quartile is equalled or exceeded) per annum of the median TSR performance of the comparative companies measured over the performance period.

2.3 : For TSR performance between 2.1 and 2.2 above an award shall vest increasing on a linear scale.

It then goes on to list 12 or 13 comparable companies.

What we want to know is, what does the above mean in laymans terms.

For example, say the shares were worth €2 and she had 50 of them, does that mean if she was to sell them they would be worth €100 (if the performance conditions are all met of course)?

I know of course that things can fluctuate and what not so Im not looking for definitive answers, we would just like to try and get a better understanding of the whole thing.

Thanks a mill.

BC.

Large fun bags

I'm not being smart. Just Google it or look at the investopedia website. Will tell you all you need to know in a few seconds

Liam McPoyle

Large fun bags wrote: »

I'm not being smart. Just Google it or look at the investopedia website. Will tell you all you need to know in a few seconds

I've tried googling it and am met with a wall of jargony text.

As I said in my op, I know nothing about it so reason I asked the question in here is because I would like a succint and simple answer, if that's alright with you of course.

daheff

Shares essentially are a part ownership of the company. They entitle you to a say (albeit small) in how the company runs and to a portion of the net assets of the company.


If you had 100 shares each valued at 1EUR you would have 100EUR worth of shares (stock).

Based on what you have outlined below, the number of shares/(value of options?) seems to be dependent on the performance of the company.


Just be aware that if you sold 100 EUR of shares you would probably pay around 20 EUR to do so. If you have to pay taxes its barely worth your while

Liam McPoyle

daheff wrote: »

Shares essentially are a part ownership of the company. They entitle you to a say (albeit small) in how the company runs and to a portion of the net assets of the company.


If you had 100 shares each valued at 1EUR you would have 100EUR worth of shares (stock).

Based on what you have outlined below, the number of shares/(value of options?) seems to be dependent on the performance of the company.


Just be aware that if you sold 100 EUR of shares you would probably pay around 20 EUR to do so. If you have to pay taxes its barely worth your while

Thanks, she has over 8000 shares and they are currently valued at over €4 each, the company has been consistently performing well and that looks to be the case for the next 12 months at least based on current projection's.

valoren

It's a golden handcuff perk.
Your wife doesn't own the shares it seems to me.
She is being promised a set amount as part of her contract.

It looks like a bonus payment structure to me.
She will need to wait 3 years before payment (this is the golden handcuff perk to prevent a high staff turnover)

It's an incentive package and the 'vestment'; i.e. the value of the shares will be paid to her
This will be paid out depending on where her company will finish in comparison to the other 12/13 companies listed.
I'm not sure about the exact contract but this maybe to take ownership of the shares or she could opt to cash in the contracted amount (8000 shares I believe you mentioned).


Think of it like the Premier League.
If her company qualifies for the Champions League then she has legals rights to claim the full value of the shares after 3 years. If the company is languishing in mid-table mediocrity the she will get a percentage of the full value.

The total shareholder return would be a measurement of the share price performance over the 3 years.

Liam McPoyle

valoren wrote: »

It's a golden handcuff perk.
Your wife doesn't own the shares it seems to me.
She is being promised a set amount as part of her contract.

It looks like a bonus payment structure to me.
She will need to wait 3 years before payment (this is the golden handcuff perk to prevent a high staff turnover)

It's an incentive package and the 'vestment'; i.e. the value of the shares will be paid to her
This will be paid out depending on where her company will finish in comparison to the other 12/13 companies listed.
I'm not sure about the exact contract but this maybe to take ownership of the shares or she could opt to cash in the contracted amount (8000 shares I believe you mentioned).


Think of it like the Premier League.
If her company qualifies for the Champions League then she has legals rights to claim the full value of the shares after 3 years. If the company is languishing in mid-table mediocrity the she will get a percentage of the full value.

The total shareholder return would be a measurement of the share price performance over the 3 years.

That's great, thanks.

Ya, they are dependent on her still being with the company 3 years from issue date which is about 2 years from now.

Say if she decided to cash them in at that time (assuming she is still working there and they are performing well) how would she go about it?

Would it be a case that her employer would issue her with a cert noting the final valuation and she would go through a broker house or would it be a case that her employer would "cash her out" at that time? (I know I've provided limited information to go on so a best guess answer is grand)

In terms of tax, capital gains etc, I assume she would be subject to that too?

Thanks for taking the time to reply.

valoren

My best guess would be that the company would cash her out.
There might not be actual physical shares involved and the 8000 'shares' would be a nominal amount to which she has a claim to as per her remuneration package.

If that was the case then the bonus would be subject to income tax and not capital gains tax and would be done through payroll.

Tax on Capital gains from shares is 33%. There is a personal limit of €1,270 in any tax year i.e. you don't pay any CGT if your profit is under €1,270. Any gain over this limit is subject to CGT.

To be honest if she had any queries about her contract then she should contact HR and ask for an explanation of the terms and conditions.

There's no such thing as a stupid question when it comes to shares/tax etc believe me.

OttoPilot

Business Cat wrote: »

That's great, thanks.

Ya, they are dependent on her still being with the company 3 years from issue date which is about 2 years from now.

Say if she decided to cash them in at that time (assuming she is still working there and they are performing well) how would she go about it?

Would it be a case that her employer would issue her with a cert noting the final valuation and she would go through a broker house or would it be a case that her employer would "cash her out" at that time? (I know I've provided limited information to go on so a best guess answer is grand)

In terms of tax, capital gains etc, I assume she would be subject to that too?

Thanks for taking the time to reply.

She would be liable for income tax under schedule E (employment income) on the difference between the price she has to pay for the shares (sounds like zero to me based on your posts) and the open market value, so 8000 shares x €4. This means her salary in the year she exercises the options will effectively be boosted by €32k and she will be liable for PAYE, employee PRSI and USC. As it's a benefit-in-kind (Gift from employer) they should handle the tax liability.

Capital Gains Tax only comes into play if she holds the shares beyond the date she exercises the options. She will be liable for 33% CGT on any profit (i.e. difference between €4 and the price at which she sells). This is self assessment so she would have to declare and pay it herself. As I said however, if she sells the shares on the date she receives them, there will be no profit effectively (€4-€4 is 0 profit) and she will only suffer income taxes on the "gift".

One more point, if she keeps the shares in 2019 (for example) she will be liable for PAYE, PRSI, USC totalling 52% of the value of the shares = €16k roughly, even though she is receiving no extra income/cash, so she/you will need to plan to pay that extra liability (Assuming she's gonna be in the top bracket).

daheff

daheff wrote: »

.......
. If you have to pay taxes its barely worth your while

One of the benefits of offering employees the bonus in the form of shares is the potential tax savings....

http://www.citizensinformation.ie/en/money_and_tax/tax/tax_on_savings_and_investments/employee_share_option_schemes.html

Approved Profit Sharing Schemes
Approved Profit Sharing Schemes allow an employer to give an employee shares in the company up to a maximum value of €12,700 per year tax-free. Approved Profit Sharing Schemes are subject to certain conditions set out in legislation and administered by the Revenue Commissioners.

Providing the scheme meets the required conditions, an employee will pay no tax on shares up to a maximum value of €12,700 per year. The employer must hold the shares for a period of time (called the "retention period") and the employee must not dispose of the shares before three years. If an employee disposes of shares before this time, he or she is liable to pay income tax on whichever is the lower of the following:

The market value of the shares when they were given to the employee or,
The value of the shares at the time of sale
Approved Profit Sharing Schemes are subject to a number of conditions that should be checked with the Revenue Commissioners. More information can be found in Revenue's publication Approved Profit Sharing Schemes IT62 (pdf).