PERFORMANCE-BASED STOCK OPTION PLANS FOR COMPANY EMPLOYEES 12 July 2024
WHY ARE STOCK OPTION PLANS IMPLEMENTED?
To encourage employees to work long-term within the company and to enhance their performance, employees are allowed to participate in ownership through stock acquisition under certain conditions. Research indicates that this method increases productivity and profitability in the workplace. For employers, it leads to improved workplace performance, while for employees, it provides an opportunity to gain additional income by becoming part of the capital.
WHAT ARE STOCK OPTION PLANS?
1. STOCK OPTION PLANS
A stock option plan grants employees the option to purchase company shares at a predetermined price and quantity within specific dates, provided certain conditions are met. These conditions are usually set by the company and may include criteria such as working for the company for a specified period or achieving a certain performance level. Stock option plans are essentially contracts between the business and its employees, and employees are not obligated to buy the shares using this option.
Initially, this option plan was limited to senior executives, but over time, it has been applied to a broader audience to reward qualified employees.
Although there is no specific regulation directly governing the implementation of stock option plans in Turkey, an examination within the framework of the Turkish Code of Obligations No. 6098 ("TCO") and the Turkish Commercial Code No. 6102 ("TCC") is possible. According to Article 403 of the TCO, an employee may be given a certain share of the production, turnover, or profit along with their wages. Another legal basis is Article 379 of the TCC. According to this article, companies can acquire their own shares. Therefore, according to the relevant article, stock options can be implemented by a board resolution resulting from the general assembly authorizing the board of directors.
Stock option plans occur in three stages. First, the company announces the stock option plan and sets the terms of the option. At this stage, the company informs a specific group of employees that they have the right to acquire company shares at a determined price if they meet certain conditions. The second stage is the vesting period. Here, employees earn the right to the stock options if they fulfill the conditions outlined in the contract. The third stage is the acquisition of shares, i.e., the exercise of the right. When the conditions specified in the option plan are met, employees exercise their earned rights and acquire the company shares.
2. DIRECT STOCK PURCHASE PLANS
These plans allow employees to purchase shares at a discounted rate, typically paid for through payroll deductions. In these plans, individuals acquire shares directly, and the shares are transferred into the employees' ownership. Due to the flexibility of these purchase plans, they can be applied to a specific group of employees. This approach can be used to enable high-performing employees to become shareholders.
3. CONDITIONAL CAPITAL INCREASE
The conditional capital increase is regulated by Articles 463 to 472 of the TCC. According to Article 463/1 of the TCC, "The general assembly may decide to conditionally increase the capital by granting creditors or employees of the company or group companies the right to acquire new shares by exercising conversion or purchase rights due to newly issued bonds or similar debt instruments, through an amendment to the articles of association." Therefore, this method also allows employees to participate in the capital and thus among the company's shareholders. As understood from the text of the article, new shares must be issued within this scope.
For a conditional capital increase to take place, a provision to this effect must be included in the articles of association (TCC 465). Additionally, according to Article 466 of the TCC, if securities containing purchase rights are issued, they are primarily offered to the existing shareholders in proportion to their shares. However, according to Article 461/2 of the TCC, "the participation of employees in the company" constitutes a justifiable reason to revoke this right of the shareholder. Employees can exercise their purchase rights with a written statement referring to the provision of the articles of association regarding the conditional capital increase; if the legislation requires the publication of a prospectus, reference is also made to it. The employee's shareholder rights arise upon the fulfillment of the commitment, which is carried out by depositing funds or through a swap via a deposit or participation bank.
4. VESTING METHOD
The vesting method, although similar to a stock option plan, fundamentally differs in that, unlike stock option plans where shares are committed at a specific value, in the vesting model, shares are not committed at a specific value. Instead, employees acquire the shares directly upon the fulfillment of certain conditions. In this model, if the conditions ("Cliff") specified in the contract between the employee and the employer are met, the shares are transferred to the employee. These conditions may include completing a certain period of service or achieving a specified performance level. If these conditions are not met, employees do not receive the shares.
The promise made to employees under vesting does not necessarily have to be company shares; other benefits such as bonus payments or retirement plans can also be subject to vesting, depending on the agreement between the parties. This method is particularly favored by startups.
