Stock grants are a modern compensation instrument in which employers provide their employees with company shares as part of a participation or stock plan. This model is also gaining increasing importance in Germany – particularly in the design of bonus agreements, holding periods, and the tax treatment of such benefits.
What awaits you:
- Stock Grants as Part of Employee Compensation: Potential and Legal Aspects
- Stock Grants vs. Stock Options: Differences and Employment Law Relevance for Employers and Employees
- Example of a Stock Grant: How stock compensation works in practice
- What are the benefits of stock grants? – Stock-based compensation in employment relationships
- Are stock grants considered income? – Tax treatment in employment relationships
- How are stock grants taxed? – Tax obligations for employees and employers
- Stock Grants for international employees – legally compliant in a global context
Stock Grants as Part of Employee Compensation: Potential and Legal Aspects
More and more companies are turning to stock grants – share-based compensation models – to retain their employees long-term. In this model, employees receive company shares not as direct compensation, but rather in return for past or future service. The goal is to more closely align the interests of the company and employees: If the share price rises, both sides benefit, which is intended to increase motivation and commitment.
Stock grants also act as an incentive for long-term employment, as the shares are often tied to vesting periods. Only after these vesting periods have expired do the shares actually become transferable. This regularly leads to employment law and tax issues – for example, regarding terminations, contract design, or social security obligations.
Stock Grants vs. Stock Options: Differences and Employment Law Relevance for Employers and Employees
Modern compensation models increasingly include participation programs to retain employees long-term and reward them based on performance. Two common forms are stock grants and stock options – both pursue similar goals but differ significantly in their legal implementation.
At Stock Grants Employees receive company shares as a direct benefit. The employer usually transfers the share value through a vesting plan, so that after the vesting period, the shares become the property of the employees without any additional consideration.
Stock Options In contrast, options only grant the right to purchase shares at a predetermined price within a specified period of time. Exercise is subject to certain conditions, and the purchase is made against payment of the agreed price. Depending on the contract, the option right may remain (partially) in effect even if the employee leaves the company early.
Both models entail complex employment law and tax issues – for example, regarding terminations, contractual arrangements, or tax obligations.
Example of a Stock Grant: How stock compensation works in practice
Stock grants are a proven tool for long-term employee retention, often linked to vesting periods. This means that the granted shares are only fully transferred to employees if they remain with the company for a certain period of time. In the event of early departure, the entitlements may be forfeited in whole or in part.
Practical example: Stock Grant for promotion
An employee is promoted to team leader. As part of his new compensation package, he receives a stock grant of 250 company shares. The agreement provides for a four-year vesting period with annual staggering: For each full year of service, 25% of the shares are transferred. After two years, the employee thus owns 50% of the granted shares. If he leaves the company before the end of the four years, the unvested shares are forfeited.
Such models place special employment law requirements on both employers and employees – for example, in terms of contract drafting, terminations or tax aspects.
What are the benefits of stock grants? – Stock-based compensation in employment relationships
Stock grants, the free allocation of company shares to employees, are an established means of promoting motivation and retention. Both employers and employees benefit from this compensation model. The key advantages at a glance:
Employee retention and recruitment of skilled workers
Companies that use stock grants strengthen their attractiveness as an employer. Highly qualified professionals value modern compensation models with long-term prospects. Existing employees have a clear incentive to remain loyal to the company – especially during the vesting period until the shares are finally transferred.
Motivation and willingness to perform
The value of shares is directly linked to the company's success. Employees who hold shares or work toward acquiring them develop a stronger interest in economic growth and the quality of their work. This increases personal responsibility, team spirit, and commitment.
Real asset from the start
Unlike stock options, stock grants have real value from the outset. Even with fluctuating stock prices, their intrinsic value remains. Employees don't have to purchase shares; they receive them as property—a particularly stable model in economically uncertain times.
Liquidity-saving and flexible remuneration
For employers, stock grants offer the opportunity to conserve cash, as a portion of compensation is paid in shares. The financial burden often only arises later, for example, after the vesting period. Employees do not have to make any upfront payments and benefit directly from the company's success.
Are stock grants considered income? – Tax treatment in employment relationships
Yes – Stock Grants are treated as income for tax purposes once they are vested, meaning employees have a legal right to the shares. From that point on, the market value of the shares counts as taxable income and is subject to income tax and, if applicable, social security contributions.
In practice, the employer often retains a portion of the shares to directly deduct the applicable taxes and duties. The remaining shares are then transferred to the employees.
The specific tax assessment depends, among other things, on:
- the date of the vesting period,
- the current market value of the shares,
- the contractual arrangement of the program,
- the tax framework at home and abroad.
How are stock grants taxed? – Tax obligations for employees and employers
Stock grants, i.e., the free allocation of company shares, are treated as wages for tax purposes once the shares vest. From that point on, the monetary benefit—that is, the market value of the shares at the vesting date—is considered taxable income.
Taxation for employees:
- Time: At the end of the vesting period.
- Assessment basis: Market value of the shares on the date of acquisition.
- Types of taxes: Income tax, wage tax, social security contributions if applicable, and local taxes (depending on the country or region).
- Procedure: The employer often retains a portion of the shares to pay the taxes directly (“sell-to-cover” model).
Tax advantages for the employer:
In many countries, such as the USA, the value of issued shares can be claimed as a business expense, thus reducing the company's tax burden. This also makes share-based compensation models attractive from a business perspective.
Stock Grants for international employees – legally compliant in a global context
More and more companies are using stock grants to attract and retain qualified specialists long-term – even across national borders. A global stock ownership program can offer decisive advantages, especially in the international competition for talent.
However, the legal and tax frameworks vary considerably around the world. Employers should therefore carefully examine how stock grants can be implemented in a legally compliant and tax-compliant manner in the respective target country.
Important aspects of international stock grants:
- Different tax obligations: Different income, wage and withholding tax regulations apply depending on the country.
- Employment law consequences: The design of shareholdings can affect the status of employees as employees or self-employed persons.
- Registration and reporting obligations: In some countries, participation plans must be registered or approved by the authorities.
Recommendation:
Companies planning to award international stock grants should seek legal and tax advice early on to avoid risks such as incorrect employee classification, tax assessments, or incorrect payroll.
Our employment law firm supports you in the legally compliant design of cross-border remuneration models – from tax audits to the implementation of employment contracts. Schedule a non-binding consultation now!
