Introduction
In the fast-paced business world of the United Arab Emirates (UAE), where many startups are growing, several of them choose to provide a certain form of ownership to their top talent to retain them for a longer period. Businesses choose several forms of share incentives that can make them attractive to such top talent. This incentivizes the employees in the company to focus on the success of the business.
UAE’s Law[1]
ESOPs in the country are regulated by the Commercial Companies Law 2021, wherein Article 228 of the law specifically provides for a “Share Incentive Scheme for Company Employees”. The Article allows any Company to increase its capital to implement share incentives for its employees. The board of directors will present a proposal for such an incentive to the General Assembly of the Company and shall then issue a resolution on the mechanism and the conditions of implementation of the scheme. The Company directors are not allowed to participate in any such Employee share incentive scheme.
Types of Share Incentive Schemes
Other than barring the directors of the company from participating in the scheme, UAE’s law does not specify any bar on the type or method of issuing these incentives. This provides companies with a leeway to design the schemes in a manner that can help them retain the talent for longer.
Several of the popular schemes are as follows:[2]
1. Stock Purchase Plans or share ESOPs: These allow the employees of the Company to purchase the shares at discounted prices from deductions made in their own salaries, resulting in direct ownership of the employees.
2. Option ESOPs: These allow the employees the right to purchase company shares at a predetermined price within a specified timeframe. The option is provided after a certain vesting period. For example, the employee will only get the option to buy 20% of the Option ESOPs after working for one year and the rest of the ESOPs shall be transferred quarterly or yearly.
3. Phantom ESOPs: In Phantom ESOPs the employees are granted hypothetical units of shares or shares that mirror the value of actual company shares. Although the employees do not own the underlying shares this however provides them with similar financial benefits.
A common factor among all the above incentives is that Companies will structure these incentives to keep the employees for longer periods in the organization and sometimes use such incentives in lieu of salaries. This incentivizes employees to work harder for a business in which they are owners themselves.
Conclusion
Many employees now work hard with the founders to make a company successful in the hope that they are either able to go public (IPO) or are acquired at a high price by a bigger business. In both scenarios, employees with such incentives have a lot to gain.
For more information, you may contact:
Francesca Romana Valeri
Fauzia Khan
