Employee Share Scheme

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The employee share scheme in Bahrain is a program that allows companies to offer securities, such as shares or share-linked instruments, to their management and/or employees.
What are the main aims and objectives?

The main aims and objectives of the employee share scheme in Bahrain are as follows:

  1. Employee Incentives: The scheme aims to provide employees with a financial stake in the company's performance and success. By offering shares or share-linked instruments, employees are motivated to work towards the company's growth and profitability, as their own financial gains are tied to it.
  2. Talent Retention: Employee share schemes can help companies retain and attract talented individuals. By offering ownership or the potential for ownership, companies can create a sense of loyalty and long-term commitment among employees, reducing turnover rates and fostering a positive work environment.
  3. Aligning Interests: The scheme aims to align the interests of employees with those of the company and its shareholders. When employees become shareholders, they have a shared interest in maximizing the company's value and profitability, which can lead to better decision-making, increased productivity, and overall success.
  4. Wealth Creation: The employee share scheme provides an opportunity for employees to participate in the company's financial growth and success. As the company's value increases, the value of their shares or share-linked instruments also increases, potentially creating wealth for the employees.
  5. Broad-based Ownership: The scheme promotes broad-based ownership by allowing a larger group of employees to participate in the ownership of the company. This can help create a stronger sense of ownership, pride, and motivation among employees, leading to increased productivity and engagement.
How does the program work?

Since the Kingdom of Bahrain legislated to allow companies to offer employee share schemes, they have been free to offer a wide range of schemes aided by the fact that individuals are typically not taxed by the government. The five main types of share scheme available are:

  1. Save as you earn

These plans encourage employees to save and purchase shares in the company with their salary. Typically, they operate over set periods of 3 to 5 years during which employees will have a certain amount taken from their salary and at the end of the period the deductions will be used to purchase shares in the company. To incentives this, companies will often offer the shares at a discounted rate.

  1. Bonus awards

Through this mechanism, companies can reward high performing employees with fully paid shares as a bonus. This type often comes with strings attached restricting employees from selling them for a certain amount of time.

  1. Growth shares

This type of share is awarded to employees or senior management conditionally upon the company achieving particular targets or growth. This type of share often does not carry voting rights.

  1. Share options

A share option is a right given to an employee to buy a share in an organization or its parent entity at a time in the future at a fixed price, often referred to as exercise price, on the day the option is granted. Assuming that there is growth in the value of shares, the employee can buy shares at a price less than the fair value. The grant value of such an option can also be at a discount to the current or future share price, giving an employee the option to buy shares at a discounted price in comparison to external stakeholders. The higher the future value of the organization, results in a better return on investment for the employees.

  1. Phantom options

Phantom shares allow a company to provide employees with the financial gains of a share option scheme but without formally issuing shares to them, normally as a mechanism to protect company ownership.

What is the overall cost?

There is currently no information on the overall cost of running share schemes in terms of lost tax revenue.

How was it implemented?

In 2020, the Kingdom of Bahrain approved a series of new amendments to the Bahrain Commercial Companies (BCC) law to help promising startups better access to funding and improve the ease of doing business in the country. As a result, Bahraini startups have the option to introduce an employee share scheme, while simultaneously raising funds through convertible notes.

The laws relating to employee share schemes in the Kingdom of Bahrain are contained in:

  1. Articles 128 and 216bis of the Decree No. 28 of 2020 (amending the Commercial Companies Law promulgated by Legislative Decree No. 21 of 2001); and
  2. Regulation No. 119 of 2021 issued by the Minister of Industry and Commerce.

Article 216bis of Decree No. 28 of 2020 provides that “A company may have one or more schemes to motivate its employees through their ownership of its shares. The company shall disclose to its employees the full details of such schemes including the conditions for their entitlement to its own such shares”. It goes on to note that the Central Bank of Bahrain or the competent Minister for commerce affairs may issue such regulations as it deems appropriate to regulate such employee share schemes.

Regulation No. 119 of 2021 makes a number of provisions in relation to employee share schemes of Closed Joint Stock Companies, including:

  • The articles of association shall provide for the relevant employee share scheme and include all their details, including conditions for employees’ eligibility, and these articles of association must be approved by a company’s extraordinary general assembly (i.e. they must approve the details of the employee share scheme)
  • The issuance of new shares allocated exclusively for the purpose of employee share schemes must be approved by a company’s extraordinary general assembly
  • A company is required to disclose to its employees the full details of any employee share scheme, including conditions for eligibility
  • Employee share schemes may include a requirement that the employee’s ownership of shares is contingent on their continued work for the company, or on the employee working for the company for a specific period of time.
  • In such cases, the employee share scheme shall specify: the consequences if the employee leaves employment of the company; the extent of the company’s eligibility to redeem shares owned by the employee; the amount payable by the company to the employee in return for redeeming those shares; and any other rights accrued to the employee in this regard.
  • The company may own shares that are redeemed from an employee, or distribute them to the rest of the shareholders in proportion to the shares they hold, free of any restriction imposed on those shares.

Article 128 of Decree No. 28 of 2020 stipulates that shareholders do not have pre-emption rights in relation to shares issued for the purpose of an employee share scheme.

What impact has been measured?

There is currently no available information on the impact of employee share schemes in Bahrain.

CURATED BY

Pakiza Abdulrahman

Head of Investor Aftercare
bahrain economic development board
Bahrain