Trusts as employee remuneration option
Creating schemes whereby employees participate in their employer's profits is a modern and innovative way of remunerating employees. Stock option plans (ESOPs) and other employee participation programmes are rather more common in the international context but have also been gradually gaining ground in the Czech Republic. As an alternative, trusts can also be used to remunerate employees.
How a trust works
A trust is a legal entity whose main purpose is the long-term asset management for a set goal. A founder creates the trust and places assets in it (which are thus separated from the founder’s personal property), determines the purpose of the trust, and adopts the trust’s statutes (by-laws) setting the rules of its operation. Each trust has a trustee who takes care of the assets and manages them in accordance with the specified conditions and objectives. Beneficiaries are then entitled to certain benefits from the trust.
In the Czech Republic, trusts are primarily used in areas other than employee remuneration, e.g., in the management of assets of companies or private individuals, or as an alternative mechanism for the intergenerational transfer of assets.
Employee trusts as a way to remunerate employees
A trust can be an alternative way to set up employee remuneration. As it is a specific tool primarily used for other purposes, its use in this area requires careful analysis and planning. It is also necessary to consider the tax implications of the chosen solution. This remuneration method can be applied by joint-stock companies as well as by limited liability companies, for employees, board members, and other persons.
Corporate governance implications
The use of a trust for employee remuneration assumes setting aside shares, interests, bonds or other securities or funds, placing them in a trust, and designating employees as beneficiaries. The beneficiaries will then be entitled to the benefits from the fund, subject to (fully discretionary) conditions set out in the fund's statutes, which may or may not be linked to the company's financial results, achievements of certain performance goals, or the passing of certain periods of time.
Thanks to trusts, employees may participate in the company's financial results without being direct owners of shares. They will thus be prevented from interfering in the company’s operations as its shareholders, disposing of the shares or, for instance, hindering the sale of the company to investors. Such rights will be exercised by the trustee appointed by the founder of the trust and will thus remain under the control of the company or its shareholder.
A key prerequisite for the implementation of a trust is setting up an appropriate legal structure including a mechanism for appointing trustees and beneficiaries, setting an investment policy, and defining rules for the distribution of benefits from the trust. The foundation is formed by carefully drafted statutes setting out the basic conditions for the trust’s operation, including the purpose and time for which the trust is being established, and the possibilities of its termination.