What: Settlement routes and plan types:

choose the way

Once it has been decided “why” to set up a share participation scheme, it needs to be determined “what” will be offered. The settlement route is the first decision, and there are three possibilities, i.e. shares, depository receipts or cash. Next, the type of plan needs to be determined. There are, in principle, 6 main types of plans. However, there are a variety of plan conditions and also many different names are used for the share participation schemes in practice. As mentioned, there is no good or bad. Alignment with the company’s goals and strategy, and with the preferences of the owner, founder, investors or other stakeholders, will determine which type of settlement and plan will suit best.

Settlement routes define governance and experience.

Before choosing a plan type, select your settlement route. It determines governance, employee experience, and tax timing. In the Dutch context, there are three routes:

  • Direct shares

Participants receive shares in the parent entity and become shareholders. This is a strong signal for an ownership culture and provides a line of sight to dividends and value growth. Governance implications include shareholder rights and information flows.

  • Depositary receipts via a Dutch trust office foundation (STAK)

The STAK holds the shares and issues depositary receipts to participants. Voting rights typically remain with the STAK, while participants receive economic rights such as dividends and exposure to value growth. This is a standard route to separate control from economics while preserving an ownership feel.

  • Cash settlement

Awards are cash settled with value linked to the share price, but no shares or receipts are transferred. This route simplifies governance and avoids dilution, while mimicking equity economics.

Selecting the settlement route first reduces complexity and clarifies governance and tax implications. It also frames participant expectations about ownership, voting, and liquidity.

Main plan types at a glance

Once the settlement route is chosen, refine the plan type:

  • Employee Share Purchase Plan (ESPP)

Employees buy shares, potentially at a discount. Some broad ESPPs are inclusive and straightforward to understand, and they can be structured to build a broad ownership culture over time. On the other hand, management/executive share purchase plans can be very complex, especially in cases where Private Equity investment structures are involved.

  • Restricted Stock

An award of (free) shares which an employee cannot sell or otherwise transfer until (time-based or performance) conditions have been met and restrictions are lifted (i.e. the award vests). The employee has voting and/or dividend rights prior to the vesting date, normally as of the grant.

  • Restricted Stock Units (RSUs)

A promise/right to receive free shares at vesting. For the award to vest, certain (time-based or performance) conditions must be met. The employee has no voting or dividend rights prior to the vesting date. RSUs are straightforward to administer and effective for retention over defined horizons.

  • Stock Options

The right to buy shares at a fixed price. If desired, certain (time-based or performance) conditions can be defined that must be met for the employee to be able to exercise the stock options (i.e. for the award to vest). Options offer leveraged upside and can preserve cash, but require careful planning on tax timing and liquidity.

  • Stock Appreciation Rights (SARs)

A right to receive, the appreciation in the value of shares of stock from the grant date (or another date if so desired) until the exercise date, in cash. SARs can also be settled in shares (stock-settled SARs), although that is not frequently used in the Netherlands. The economic benefit is similar to stock options until the moment of exercise; therefore, SARs are sometimes also called phantom options.

  • Phantom Stock

A right to receive an amount in cash in the future based on the value of a number of shares. For the employee to receive the cash (i.e. for the award to vest), certain (time-based or performance) conditions must be met. The economic benefit is similar to that of RSUs until the moment of vesting.

Lifecycle of share-based incentives

Every type of incentive follows a repeatable cycle. However, not all events apply to all types or are relevant for all types. For example, purchase only applies to ESPPs. All other types start the lifecycle at grant. Exercise only applies to stock options and SARs. For stock options, the exercise means the moment the option right is transferred into the actual share or depository receipts. The term tradeable is newly introduced since 2023 for the lifecycle in the Netherlands and is introduced due to the new Dutch tax rules, and is only relevant for stock options. Sale is relevant for shares or depository receipts, as cash is automatically received for the cash-settled awards, like SARs and phantom shares, and no sale is needed. The lifecycle is, in general, also very important from a tax and/or payroll perspective. We refer for more details to the paragraph where the Dutch tax consequences are discussed. However, it is very important to know before making the decision about which type of incentive you choose, what the tax consequences are but also what the risk and cash-flow needs for the participants will be and when. Obviously, the preference is low risk, low cash-flow impact and low taxes due. Unfortunately, it does not work like this in most cases. Therefore, having a good understanding of the tax consequences is key. We will address this in the next paragraph.

The lifecycle below shows the standard sequence.