Shareholder ownership and incentives: motivating, aligning, and guiding corporate strategy.

The Agency Problem and Alignment with Corporate Objectives

The “agency problem” arises from the separation between ownership and control: managers (agents) may be driven to pursue personal objectives rather than those of shareholders (principals). Incentive tools based on company performance are designed to reduce this misalignment, turning managers into “co-owners” through:

1. Stock Options: the right to purchase company shares at a predetermined price after a period of time (vesting).

2. Phantom Shares: financial instruments that mirror the value of shares, without the need to transfer ownership.

3. Stock Grant Plans: the free allocation of shares upon the achievement of specific objectives.

This dynamic is linked to Victor Vroom’s Expectancy Theory, outlined in his book Work and Motivation (1964), which explains how employees are more motivated when they perceive a clear link between their contribution, organizational performance, and personal benefits.

Retention and Competitor Hopping: The Role of Vesting

Another crucial challenge is retaining key talent. Incentive plans introduce the vesting mechanism, which ties access to benefits to a minimum period of service within the company. Examples of vesting:

Cliff Vesting: the right fully matures after a set period (e.g. 3 years).

Graded Vesting: the right accrues progressively (e.g. 25% per year for 4 years).

This not only discourages key employees from leaving the company, but also creates a stronger psychological bond with the organization, reducing their tendency to consider offers from competitors.

This approach, in addition to strengthening the economic relationship, also develops a sense of fairness and organizational justice, as suggested by John Stacy Adams’ Equity Theory (Toward an Understanding of Inequity, 1963), according to which employees assess their effort in relation to rewards, increasing retention and reducing the risk of turnover towards competitors.

Executive Plans vs. Broad-Based Plans

Incentive tools are divided into:

Executive Plans

Purpose: Align executives with shareholders’ interests and motivate them to achieve long-term objectives.

Common tools: stock options, performance share plans linked to financial KPIs.

Motivation: For executives, the connection between company performance and personal reward creates a sense of responsibility and a results-oriented mindset.

This mechanism recalls Deci and Ryan’s Self-Determination Theory, presented in their book Intrinsic Motivation and Self-Determination in Human Behavior (1985), where financial incentive (extrinsic) combines with deep involvement in the company’s success (intrinsic).

Broad-Based Plans

Purpose: Involve a wide base of employees, creating a sense of belonging and a shared corporate culture.

Common tools: Employee Stock Ownership Plans (ESOPs), share bonuses.

Motivation: For non-executive employees, the opportunity to participate in the company’s growth generates inclusion and a sense of shared contribution.

The Fincantieri Case: A Broad-Based Share Ownership Model

Recently, Fincantieri introduced a broad-based share ownership plan involving not only executives, but also employees. The main objectives are:

Engagement: Promote a sense of belonging, making employees feel like an integral part of the company’s success.

Recognition of individual contribution: Link economic benefits to company performance, motivating all levels of the organization.

Subscription incentive: in addition to the possibility of using the welfare bonus for subscription, a double bonus is provided for maintaining the shares over the following two years, equal to a further 5 shares for each share purchased

Unlike more traditional models, Fincantieri’s recent plan stands out for its “inclusive” approach, aimed at strengthening internal cohesion. This is an emblematic case of how broad-based plans can be used to create cultural and organizational value, consistently with the principles of Equity Theory and organizational belonging.

Comparison with Other Models: Stellantis and Leonardo

Stellantis

It has implemented an incentive plan combining stock granting and bonuses linked to financial results.

Primary focus: executives, with a strong emphasis on increasing shareholder value.

Key difference: compared with Fincantieri, Stellantis focuses more on executives, with less inclusion for operational employees.

Leonardo

Plans linked to sustainability (ESG) objectives and long-term performance.

It has integrated incentives that reward the achievement of targets related to digital transformation and emissions reduction.

Key difference: focus on specific KPIs and a structure involving both executives and middle managers.

Motivational Mechanisms

Long-term incentive tools act on different motivational levers:

Sense of belonging: The idea of owning part of the company increases employees’ commitment and satisfaction.

Long-term perspective: Linking benefits to multi-year objectives pushes employees to focus on the company’s future rather than immediate results.

Deterrence towards competitors: Plans structured with vesting strengthen the emotional and economic bond with the organization, making a move to another company less attractive.

Stock Options: Regulation, Implementation Methods, and Economic and Tax Advantages

Employee incentives through financial instruments represent a solution that companies use within the framework of specific regulatory, corporate, and tax provisions, as well as those relating to capital markets, in the case of listed securities reserved for employees.

Naturally, regulatory obligations represent the framework within which companies must operate after deciding to issue incentive instruments, whose strategic relevance makes it possible to correlate employee rewards with the company’s economic, financial, and capital structure and, usually, with its Industrial Plan objectives.

Broad-based share ownership and Stock Options are instruments through which companies incorporated as corporate entities reserve a portion of their capital for the immediate or future issuance of shares or quotas reserved for employees, thereby expanding their capital in the employees’ favor.

This transaction must necessarily be approved by the shareholders’ meeting, based on a specific proposal by the Board of Directors, which defines the elements of the incentive plan to be included in a specific Regulation to be shared with the beneficiaries.

It is good practice, as well as widespread practice, to precede the drafting of the detailed regulation with a remuneration plan design phase, in which professionals from different fields (HR, Tax & Legal, Finance) align, through an ad hoc project, the ownership’s needs with the plan’s objectives and motivational levers for each organizational level, taking into account the characteristics of the market, the industry, and the specific corporate context. This remuneration plan, which combines different perspectives and sometimes diverging interests at the outset, will ultimately serve as a guideline for the subsequent drafting of the regulation.

Among the essential elements contained in the Regulation:

maximum number of shares or quotas reserved for employees,

timeframes for exercising any options or obtaining share bonuses,

subscription/exercise price of the incentive instrument

elements strictly connected to the specific needs of each company, usually identified in line with the company’s Industrial Plan.

In this regard, by way of example, upon the achievement, on predefined dates, of certain economic and financial objectives of the company, represented by Industrial Plan KPIs (including EBITDA, Net Financial Position, Annual Revenue, but also CO2 emissions reduction or other targets), the Regulation could provide for the exercise of the option at a predefined price, equal to the corresponding net equity value for unlisted companies and the market price for listed companies, values referring to a specific date prior to the allocation of the incentive instrument.

With regard to ESG issues, in line with sustainability trends, many companies are beginning to link incentive objectives to ESG targets, such as reducing CO2 emissions or promoting social inclusion. This approach not only improves the company’s reputation, but also allows access to specific tax incentives and helps attract investors interested in sustainability.

Similarly, there may be Regulations providing for the exercise of the option only upon the expiry of the vesting period, considering that the employee’s continued service in the company for the predefined period is itself already a relevant objective for the company.

The definition of the Regulation for Stock Options or subscribed shares is therefore a strategic choice for the company: larger companies with a consolidated history will propose more articulated and complex plans, while companies such as start-ups will be more interested in employees remaining committed to the project undertaken and, therefore, will frequently propose plans associated with continuity of the employment relationship.

The application of the Regulation to the issuance of securities dedicated to employees is normally entrusted to the Chief Executive Officer who, in turn, usually relies on the company’s HR department for concrete implementation.

Naturally, the Regulation may be subject to changes in order to take account of regulatory changes and/or the Industrial Plan, as well as the emergence of inconsistencies with changed business needs.

The economic advantage for employees arising from such incentives derives from various factors, including:

the increase in value of the acquired security compared with that of the subscription, in some cases also made using resources from corporate welfare made available to the individual employee;

the tax treatment of the capital gain at the time of any sale of the security;

specific protections in the event of interruption of the employment relationship during the vesting period or the bonus accrual period, normally granted only for reasons not dependent on the employee’s will.

Despite the advantages, the use of incentive instruments also entails certain risks. For employees, poor company performance could reduce the value of the shares received, while for the company, a poorly structured plan may generate unexpected costs.

The introduction of safeguard mechanisms, such as a guaranteed minimum price for Stock Options, can mitigate these risks, ensuring a balance between incentives and economic sustainability.

With regard to tax treatment, the allocation of shares reserved for employees, and of Stock Options, does not constitute employment income, even at the end of any lock-up period on sale or vesting period for exercising the option to purchase the security, however with a significant difference between traditional companies and start-ups and innovative SMEs:

for traditional companies, this favorable treatment applies up to the limit of € 2,085.63 per fiscal year (Art. 51, paragraph 2, letter g) of the Italian Consolidated Income Tax Act), whereas the countervalue of securities allocated above this limit is subject to the tax (and social security) treatment applicable to employment income

for start-ups and innovative SMEs, this limit does not apply (derogation introduced respectively by Art. 27 of Decree-Law 179/2012 and by Art. 4, paragraph 9 of Law 3/2015) and therefore the countervalue of the allocated securities is not subject to the tax treatment applicable to employment income.

In both cases, the capital gain on the security, only in the event of sale to third parties by the employee, is subject to taxation as capital income.

For start-ups and innovative SMEs, in order to support the achievement of business results through the provision of qualified services, it is also permitted to extend Stock Option plans to collaborators, to whom the same discipline referred to in point b) above applies and for whom the capital gain from the sale of the security is capital income (and not self-employment income).

In the event of termination of the employment or collaboration relationship during the vesting period, for reasons not attributable to the employee’s or professional’s choices (therefore also in the case of mutual termination), the Regulations normally provide for the proportional allocation of securities accrued up to that date or any share bonuses.

The subscription of securities reserved for employees may also take place, within the framework of corporate welfare policies, by using funds deriving from bonuses granted by the company, thus allowing employees to invest in the capital of their own company by drawing on financial sources additional to already available savings.

The opportunity to invest in securities of one’s own company represents a potentially very profitable investment, as it may provide an expected return higher than that of investment instruments in the money market, while also ensuring diversification of the risk of one’s savings.

Conclusions

Long-term incentive tools, from executive plans to broad-based plans, are not only financial instruments, but powerful psychological and cultural levers. Their success depends on the ability to align business objectives with employees’ motivations, strengthening the sense of belonging and improving overall performance.

Long-term incentive instruments have a significant economic impact, fostering talent loyalty, reducing turnover costs, and supporting strategic business objectives, such as increasing financial KPIs (for example EBITDA and Net Financial Position) and also ESG KPIs. For employees, they offer added value thanks to the potential growth of personal wealth and favorable tax treatment, making them effective tools both for companies and for workers.

What We Can Do for You:

Review of statutory provisions for activation of the incentive plan

Assessment of the plan’s objectives

Assessment of equity ownership objectives vs. management practices

Design of plan characteristics and terms

Plan price & conditions (definition of the value of the shares/quotas to be assigned to beneficiaries and of the capital increase)

Plan structuring and implementation

Strategic labour law assistance