Beyond Cash and Gratuity

Choosing the right mix of employee rewards is a critical strategic decision for any organisation aiming to attract, retain, and motivate top talent.

While traditional tools like cash bonuses and end-of-service gratuity continue to play an important role, Share-Based Payment arrangements (SBPs) – such as Long-Term Incentive Plans (LTIPs), Employee Stock Option Plans (ESOPs), and Employee Share Purchase Plans (ESPPs) – offer strategic advantages that can strengthen an organisation’s compensation framework and talent proposition.

However, integrating SBPs effectively requires more than just acknowledging their incentive potential; it demands a rigorous understanding of the key financial, accounting, legal, and operational implications. Many companies encounter challenges by failing to evaluate how SBPs complement or compare with other benefits, or by overlooking critical design and compliance considerations. 

This blog explores the unique features and complexities of SBPs, then compares them to other common employee benefits to help leaders determine their appropriate role in a modern, effective total rewards strategy.

Defining Your Strategic Objectives

Before implementing SBPs, or refining existing ones, it's crucial to first define clear strategic objectives. Are you looking to attract, retain, or incentivise top talent? How do SBPs fit into your broader compensation philosophy?

A comprehensive compensation package typically blends promotions, salary increases, cash bonuses and post-employment benefits such as gratuity payments or pensions. These elements vary in structure. Payments can be one-off or in instalments; timing may be immediate or deferred; duration can be short-term or long-term; and rewards can be tied to past service or forward-looking performance. 

Against this backdrop, let’s look at the distinctive features of SBPs.

Features of Share-Based Payments

Flexibility

The universe of share-based payments is highly diverse. Far from being a one-size-fits-all compensation tool, SBPs can be carefully designed to align with specific reward objectives.

Instrument Type

You're not limited to a single form of equity. The most common instruments offer distinct advantages:

• Restricted Stock Units (RSUs) / Share Grants. Granting employees actual shares, or the right to receive them after a vesting period.
• Share Options. Granting employees the right, but not the obligation, to purchase company shares at a pre-determined price (the exercise price) within a specific timeframe. These are particularly attractive for growth-oriented companies, as their value is tied to share price appreciation. 
• Employee Share Purchase Plans (ESPPs). Allowing broader employee participation by enabling them to purchase company shares, often at a discounted price, through payroll deductions. This promotes widespread ownership and aligns the entire workforce with company success.

This design adaptability is a key distinction when SBPs are compared against more standardised reward mechanisms.

Settlement Method

This feature has significant implications for both accounting and cash flow:

• Equity-settled. The company issues its own equity instruments (shares or options) in exchange for employee services. The accounting cost is fixed at the grant-date fair value and recognised over the vesting period, without subsequent remeasurement. This provides predictability in P&L impact, which benefits financial forecasting and investor communications. 
• Cash-settled. The company incurs a liability to pay cash to employees, with the amount tied to fair value of equity instruments. The liability is remeasured at each reporting date, leading to potential volatility in the P&L as share prices fluctuate. This approach may suit companies wishing to avoid dilution or maintain tighter control over equity.

Vesting Conditions & Performance Metrics

• Time-based Vesting. Requiring employees to remain with the company for a set period.
• Performance-based Vesting. Linking vesting to achievement of pre-defined company, team, or individual performance targets (e.g., revenue growth, EBITDA, project milestones). 
• Market-based Vesting. Incorporating market conditions, such as Total Shareholder Return (TSR) relative to an industry index, which are factored into grant-date valuation.

Grant Size, Eligibility & Frequency

Companies retain full control over who receives eligibility, award size (broad-based vs. executive-specific), and grant frequency (annual, ad-hoc, new hire).

Fostering a Long-Term Ownership Mindset

Share-based payments are inherently long-term and forward-looking. Unlike short-term cash incentives, they foster an ownership mindset.

By making employees partial owners (or linking rewards directly to share value), SBPs align employee contributions with shareholder interests, encouraging focus on sustainable growth, profitability, and long-term value creation rather than short-term results.

Features such as vesting periods reinforce retention by encouraging employees to stay longer – a core HR and business continuity objective.  ESPPs, even at lower levels, can also strengthen loyalty by providing employees with a tangible stake in long-term performance.

When combined with carefully calibrated exercise prices or robust performance conditions, SBPs deliver greater motivational impact for a given cost. 

Improved Liquidity, Increased Complexity

Share-based payments provide liquidity advantages but introduce significant valuation and accounting complexities

For startups, scale-ups, or high-growth companies, managing cash flow is paramount. SBPs allow firms to offer competitive, equity-linked compensation to attract and retain top talent without immediately draining cash reserves.

Cash outflows (for cash-settled plans) or dilution (for equity-settled plans) are typically deferred until a future liquidity event such as an IPO, acquisition, or a later exercise date. This preserves working capital for reinvestment into operations. This capacity to incentivise talent without immediate cash drain presents a clear advantage over direct cash compensation for companies in a growth phase.

However, determining fair value under IFRS 2 – Share-based Payment is highly technical. IFRS 2 requires companies to recognise an expense for services received in exchange for equity instruments or liabilities linked to share price. Costs are recognised progressively over the vesting period, directly affecting both P&L and balance sheet.

Successfully navigating these requirements usually requires external valuation expertise as well as internal finance teams with strong working knowledge of IFRS 2.

Legal and Governance Considerations

Establishing share-based payment arrangements involves substantial legal and governance responsibilities that go well beyond plan design:

Board and Shareholder Approval

Most SBPs require formal approval by the Board, and in many cases, shareholder approval is also a mandatory legal or stock exchange requirement — particularly where new shares are issued or when executive participation could create conflicts of interest. 

Securities Law Considerations

Listed companies must comply with strict disclosure rules covering plan terms, grant levels, and the overall impact on share capital. Private companies are not exempt; they must navigate applicable exemptions with care to avoid inadvertently breaching offering or fundraising regulations.

Employment Law Alignment

Plan terms need to be legally watertight and explicit on sensitive issues such as termination (“good leaver” vs. “bad leaver” and their impact on vested and unvested awards), treatment on change of control, restrictive covenants, and post-employment obligations. Ambiguity here creates both litigation risk and reputational exposure.

Tax Implications

The tax consequences of SBPs are complex and vary across jurisdictions and over time (grant, vesting, exercise, and sale). Employers must manage deductibility, payroll reporting, and withholding obligations, while employees may face different exposures to income tax, social security contributions, and capital gains tax depending on the structure.

Documentation and Governance

Plan rules should set out eligibility, vesting and exercise procedures, dividend treatment, amendment rights, and dispute resolution. Strong governance typically requires ongoing oversight, often delegated to the Remuneration Committee or directly retained by the Board. This includes approving individual grants, interpreting plan rules, managing modifications, and ensuring consistent and fair application.

Share-Based Payments Compared with Other Compensation 

To further contextualise SBPs within the broader landscape of employee remuneration, we can compare their key characteristics with other common compensation tools.

While each element of a reward package serves a distinct purpose, understanding their objectives, mechanics, and financial implications is crucial for designing a cohesive and effective compensation strategy. 

The following table summarises how Share-Based Payments differ from traditional forms such as Cash Bonuses and End-of-Service Gratuity Benefits. This comparison highlights key differences in structure, performance linkage, incentive effects, and accounting treatment under IFRS. Taken together, these distinctions help clarify when SBPs are the most effective tool within a company's total rewards framework.

How Lux Actuaries Can Support Your SBP Strategy

Lux Actuaries is licensed to perform financial consulting and advisory services and provides end-to-end support for employee incentive plans (LTIPs, ESPPs, and ESOPs). Our services cover strategic scheme design, IFRS 2 valuation and reporting, and ongoing managed services.

We ensure your arrangements are compliant, competitive, and effectively tailored to your business goals across the GCC region. To learn more, contact us today.