Double edged incentive plans

Posted on 25 Aug 2011 by The Manufacturer

Jane Gray highlights potential blockers to incentive schemes in Germany and the Eurozone as companies try to defy declining productivity.

This week it was announced that the manufacturing sector in the Eurozone had shrunk for the first time in two years.

Weak PMI figures in July gave way to a dip below the golden 50 for the Eurozone as a whole this month according to financial information company Markit. In Germany, the Eurozone’s largest manufacturing economy, PMI figure remained precariously above 50 but growth was deemed extremely slow.

With many manufacturers and manufacturing groups having facilities across Europe this turn of events magnifies the scale of domestic concerns over way to combat the sluggish climate. Key among these are the issues of workforce retention and incentivisation.

Thinking of new ways of rewarding loyal and hardworking staff, such as cash settlements or share schemes, has become a trend in the aftermath of recession as companies attempt to recoup morale after headcount reductions and stimulate productivity.

But forming a fair strategy for worker incentives across multiple locations is not as easy as it may seem. In a recent report from law firm Eversheds I was interested to see an analysis of the limitations and legal framework around employee incentives in Germany.

While many employees of multinational firms in Germany, particularly at a senior management level, do participate in incentive schemes it has been found that tax regulation and other legal anomalies can make taking advantage of them somewhat difficult. In many cases inventive plans which were devised in one company jurisdiction essentially contravene German law.
Evershed’s whistle-stop guide to the pitfalls of incentive scheme in Germany seems to offer a good groundwork for any manufacturer who may not have been aware of the possible legal contraventions.

The article (part of a regular e-briefing to which manufacturers can subscribe) highlights problems and opportunities around incentive schemes for firms operating in Germany. The key models addressed are; share option plans, share acquisition or purchase plans, restricted shares and restricted stock units, phantom or cash-settled plans.

The tax treatment under German law for benefitting from any one of these are also detailed, for instance, the delivery of shares acquired under a share purchase plan is subject to income tax and social security contributions liabilities.

If you operate in Germany and are considering ways of boosting morale among staff in these difficult times I would strongly advise familiarising yourself with the legal framework for employee rewards. Imagine the misfortune of promising a fillip for hard work, only to incur tax trouble on either the favoured individual of the company itself.

The Eversheds article I read can be found here along with the offer of further advice and guidance.