A bipartisan group of senators and members of the House introduced legislation today that would make it easier for businesses to give employees an ownership stake through stock options.
Stock options are a right to purchase shares of a company at a future time at a fixed price. However, the tax implications often make this impractical for many employees of non-public firms. The Empowering Employees through Stock Ownership Act (EESO) seeks to remedy that by giving employees flexibility in handling their tax obligations for up to seven years after exercising their stock options.
To be eligible, stock options must be extended to 80 percent of the workforce. Majority owners, corporate officers, and the highest-paid executives would not be eligible for the seven-year tax deferment.
The legislation was sponsored by U.S. Sens. Mark Warner (D-VA) and Dean Heller (R-NV), along with Reps. Erik Paulsen (R-MN) and Joseph Crowley (D-NY).
“Giving more employees an opportunity to own a stake in their company can have a profoundly positive impact on workplace culture and productivity,” Warner said. “Stock options can help rank-and-file workers share in their company’s success, and also offer cash-poor start-ups an important tool for recruiting and retaining top talent.”
By expanding stock options beyond top management to a broader universe of workers, it would create new incentives and economic opportunities for businesses and their employees, Warner added.
“Employee ownership is a powerful tool that not only provides greater economic opportunity for employees, but increases employee engagement, motivation, and drives economic growth across Nevada and this country,” Heller said.
He said this will help companies retain and attract talent and fuel entrepreneurship.
“American startup companies are the birthplaces of many breakthrough, forward-thinking ideas and technologies, and we need to ensure they are attractive places to work for top talent,” Paulsen said. “This commonsense proposal empowers employees of these companies to have more ownership stake in their ventures, and further encourages innovation and entrepreneurship.”
Crowley said it gives workers the opportunity to share in the success of companies they help build.
“These are the types of workplace environments that should be fostered – ones where workers are engrained into the fabric of the company, have an economic stake in its success, and see their compensation increase as the company succeeds,” Crowley said.
Under current law, employees are required to pay taxes when they exercise their options or when their Restricted Stock Units (RSUs) vest. In order to access their employee ownership stake, employees are required to pay taxes on the excess of the fair market value of the stock – the difference between the amount paid and the fair market value – and the employer receives a tax deduction on the date the employee exercises the option.
For companies that are publicly traded, employees can sell all or a portion of their shares on the public market to pay for their taxes, but in the case of privately held companies, there is generally not a market for employees to liquidate shares to cover their tax liability, and as a result, many employees are unable to exercise their stock options, missing out on the opportunity to gain wealth as their company succeeds.
“Stock options are a critical tool for startups to attract, retain, and incentivize top talent, but the existing tax regime around stock option compensation makes it unnecessarily difficult for employees to realize the value of their equity. This policy change is a no-brainer and a win-win for both startups and their employees,” Evan Engstrom, executive director at advocacy group, Engine, said.