Employee equity incentive schemes are one of the most powerful tools available to Singapore companies seeking to attract, retain, and motivate key talent. Three structures dominate: Employee Stock Option Plans (ESOPs), share awards (including restricted share units and performance shares), and phantom equity (including share appreciation rights). Each structure has distinct legal, tax, and accounting implications under Singapore law.

This guide walks through the mechanics, legal requirements, IRAS tax treatment, and implementation steps for each structure, so that founders, directors, and HR leaders can make informed decisions about which instrument best suits their company and workforce.

Part 1: Employee Stock Option Plans (ESOPs)

How ESOPs Work

An ESOP grants an employee the right — but not the obligation — to purchase a specified number of company shares at a predetermined price (the exercise price or strike price) at a future date. The option has value when the company’s share price exceeds the exercise price.

Key ESOP terms:

• Grant date: The date on which the option is issued to the employee
• Vesting schedule: The timetable over which the employee earns the right to exercise the option. A typical structure is a 1-year cliff (nothing vests until 12 months) followed by monthly or quarterly vesting over 3 additional years (total 4-year vest)
• Exercise price: Typically set at fair market value on the grant date for private companies, or at the market price for listed companies
• Expiry: Options typically expire 10 years from grant date if unexercised
• Exercise window: The period during which a vested option may be exercised, often subject to blackout periods for listed companies

Singapore Legal Requirements for ESOPs

For a private Singapore company, implementing an ESOP requires:

1. Shareholders’ approval by ordinary resolution (or special resolution if the company’s constitution requires it) to adopt the ESOP scheme and to authorise the allotment of new shares upon exercise
2. Board resolution approving the ESOP rules and each grant made under the scheme
3. An ESOP rules document (sometimes called a Share Option Plan or SOP) that sets out the terms governing grants, vesting, exercise, and lapse
4. Option grant letters issued to each employee, specifying the number of options, exercise price, vesting schedule, and expiry date
5. Updating the cap table to record unexercised options and their potential dilutive effect

For listed companies on SGX, additional requirements apply including the need to comply with the SGX Listing Rules on share plans, which set limits on the total number of shares that may be issued under all share schemes (typically capped at 15% of total issued shares).

IRAS Tax Treatment of ESOPs

Under the ESOP scheme in Singapore, tax is imposed at the point of exercise, not at grant or vesting. The taxable amount is the open market value of the shares at the date of exercise minus the exercise price paid. This gain is treated as employment income and taxed at the employee’s marginal personal income tax rate.

Example: If an employee exercises options to acquire 10,000 shares at an exercise price of S$1.00 per share, and the shares are worth S$3.00 on the exercise date, the taxable gain is S$20,000 (i.e., 10,000 × (S$3.00 − S$1.00)).

The Qualifying Employee Equity-Based Remuneration (QEEBR) scheme allows eligible employees to defer the payment of tax on gains from qualifying ESOPs over a period of up to 5 years, subject to conditions. Employees should consult a tax adviser on whether their ESOP qualifies.

Part 2: Share Awards

Restricted Share Units (RSUs)

An RSU is a promise to issue shares to an employee upon the satisfaction of vesting conditions (typically continued employment for a specified period, or achievement of performance targets). Unlike an ESOP, there is no exercise price — the employee receives shares at no cost upon vesting.

RSUs are simpler than options in one key respect: the employee always receives value as long as the company’s shares have any value. They do not need to make a payment to acquire shares, and there is no risk of an option being “underwater” (i.e., where the exercise price exceeds the market value, making the option worthless to exercise).

Performance Share Units (PSUs)

A PSU is an RSU with an additional performance condition. Vesting depends not only on continued employment but on the company achieving specified targets — revenue, EBITDA, ARR, profitability, or other agreed metrics. PSUs are common in listed company long-term incentive plans (LTIPs) and are increasingly used by growth-stage private companies seeking to align senior management incentives with business outcomes.

Singapore Legal Requirements for Share Awards

Implementing a share award scheme requires:

1. Shareholders’ approval to adopt the share award plan and to authorise the allotment of new shares on vesting
2. Board resolution approving each award
3. A Share Award Plan document (or RSU Plan / PSU Plan) setting out terms
4. Award letters issued to participants, specifying the number of units, vesting schedule, performance conditions (if any), and settlement method (new shares or treasury shares)

Share awards may be settled by issuing new shares (requiring allotment) or by transferring treasury shares if the company holds any. For guidance on allotting shares in Singapore, see our article on how to allot and transfer shares in Singapore.

IRAS Tax Treatment of Share Awards

For RSUs and PSUs, tax is imposed at the point of vesting. The taxable amount is the market value of the shares on the vesting date. This is treated as employment income. There is no deduction for any purchase price because the employee pays nothing.

Example: If 5,000 RSUs vest and the shares are worth S$4.00 per share on the vesting date, the employee has taxable income of S$20,000.

Part 3: Phantom Equity and Share Appreciation Rights

What Is Phantom Equity?

Phantom equity is a cash-based incentive that tracks the economic value of company shares without actually issuing shares. The employee receives a cash payment equal to the value of a notional number of shares (or the appreciation in value of those shares) upon a triggering event — typically a sale of the company, an IPO, or a specified date.

Phantom equity is particularly useful for companies that:

• Wish to avoid shareholder dilution
• Have complex cap table structures that make share issuance difficult
• Want to incentivise employees without granting actual ownership rights (voting rights, information rights)
• Are structured as partnerships, LLPs, or other entities that cannot easily issue shares

Share Appreciation Rights (SARs)

A SAR is the most common form of phantom equity. It gives the holder the right to receive a cash payment equal to the increase in value of a notional share between the grant date and the exercise date. SARs mirror the economics of a stock option but are settled in cash rather than shares.

Example: A SAR is granted when the notional share value is S$2.00. On the exercise date, the notional share value is S$5.00. The SAR holder receives S$3.00 per SAR in cash.

Full Value Phantom Shares

Some schemes grant “full value” phantom shares — the employee receives the entire value of the notional share (not just the appreciation) upon vesting. These are the cash equivalent of RSUs.

Singapore Legal Requirements for Phantom Equity

Because phantom equity is a contractual obligation to pay cash, it does not require shareholders’ approval to issue new shares. The legal requirements are:

• Board resolution approving the phantom equity scheme and individual grants
• A Phantom Equity Plan document setting out the terms
• Individual grant agreements issued to participants
• Accounting treatment: phantom equity creates a liability on the company’s balance sheet (unlike ESOPs and share awards, which may be treated as equity-settled under SFRS(I) 2)

IRAS Tax Treatment of Phantom Equity

Cash payments received under a phantom equity or SAR scheme are treated as employment income and taxed at the employee’s marginal rate in the year of receipt. There is no deferral mechanism equivalent to the QEEBR scheme. Employers must withhold tax via the payroll system.

Comparing the Three Structures

Implementation Steps: Setting Up an Employee Equity Scheme in Singapore

1. Choose the right structure — Consider dilution tolerance, employee tax preferences, cap table complexity, and whether the company is private or listed
2. Engage a corporate lawyer to draft the scheme rules, shareholder resolutions, and participant agreements in compliance with the Companies Act and, if listed, SGX Listing Rules
3. Obtain shareholders’ approval at a general meeting (for ESOPs and share awards) — for private companies, written resolutions may be used instead of a physical meeting
4. Pass board resolutions adopting the scheme and approving each grant
5. Determine the valuation — For private companies, establishing a defensible fair market value for the shares at the time of grant is critical for setting exercise prices and satisfying IRAS requirements. Consider an independent valuation
6. Issue grant letters / award agreements to each participant setting out their individual terms
7. Update the cap table to reflect options or awards granted, including their dilutive potential
8. Establish a vesting tracker to monitor vesting dates and trigger the necessary corporate actions on vesting or exercise
9. Brief your payroll team on the tax withholding obligations that arise on exercise (ESOPs) or vesting (RSUs/PSUs) or receipt (phantom equity)
10. File with IRAS — Employers must report equity-based remuneration in employees’ IR8A forms. Ensure the accounting and HR teams are aligned on reporting obligations

For the underlying corporate actions required — such as passing the necessary resolutions — see our guides on board resolutions in Singapore and the Singapore Company Compliance Calendar 2026.

Common Pitfalls to Avoid

• Failing to get shareholders’ approval before granting options or share awards — this renders the grants invalid and any subsequent allotment of shares unlawful
• Setting an exercise price below fair market value without understanding the IRAS implications, which may result in a deemed benefit-in-kind at the grant date
• No vesting cliff — granting immediately-vesting options or shares exposes the company to key employees leaving shortly after grant with fully vested equity
• No good leaver / bad leaver provisions — the scheme rules must specify what happens to unvested options or awards when an employee leaves, and whether vested options lapse after a specified post-termination exercise period
• Ignoring accounting treatment — equity-settled schemes under SFRS(I) 2 require the company to recognise a share-based payment expense over the vesting period, which affects the P&L

How Raffles Corporate Services Can Help

At Raffles Corporate Services, we assist Singapore companies with the corporate secretarial aspects of employee equity schemes, including drafting board and shareholder resolutions, maintaining the cap table, processing share allotments on exercise or vesting, and coordinating with your legal and tax advisers.

To discuss setting up an ESOP, share award scheme, or phantom equity plan for your company, contact us at [email protected] or call, SMS, or WhatsApp +65 8501 7133.

— The Editorial Team, Raffles Corporate Services