What is an incentive program?

Incentive Programs for Companies

An incentive program is an agreement between a company and its employees designed to motivate employees. These programs use various tools to give participants a financial interest in the company’s development. Incentive programs can include:

• Individual arrangements for management and key employees.
• Collective arrangements for all employees.
• Alternative schemes for newer companies with limited capital to replace higher fixed salaries.

Warrants

Warrants are a subscription right that a company can offer to one or more employees. This gives the employee the right to subscribe for shares in the company at a specified time. Typically, warrant agreements include:

• A vesting period during which the warrant cannot be exercised.
• An exercise period during which the employee can exercise the warrant.

To offer warrants, the company must decide on a capital increase at a general meeting or be authorized by the company’s top management to offer warrants. The issuance of warrants requires the preparation of company law documents for use during the general meeting.

Options

An option, also known as a purchase right, gives the right (but not the obligation) to buy shares on a specific date at a specific price. Unlike warrants, options involve already existing shares, so they do not require:

• Amendments to the company’s articles of association.
• A general meeting for approval.

Because options do not require formalities like warrants, option agreements are typically simpler to implement.

Acquisition of Shares

Companies can offer employees the opportunity to purchase shares with a vesting clause, which includes a repurchase right. This clause means employees must “earn” ownership of their shares over a specified vesting period. The duration of the vesting period is determined by the shareholders.

This type of share purchase is commonly offered by private and public limited companies in the start-up phase. It is particularly useful for:

• Companies unable to pay competitive salaries.
• Securing key employees by making them shareholders.

Under the repurchase right, employees earn the right to retain their shares by continuing to work in the company. If an employee resigns or defaults before the vesting period expires, other shareholders can exercise the repurchase right to buy back the shares.