Thursday, November 7, 2019

The costs of fighting inequality


Following up on an earlier post, Why are there so few unicorns in Europe?, Bloomberg suggests an answer straight out of Chapter 1:  the EU limits on incentive pay, particularly on stock options, make it difficult for innovators to align the incentives of employees with the profitability goals of the company:

"...when you’re not highly profitable, you have to incentivize employees on the promise of the upside.”  

Onerous rules and taxation make this difficult to do.  Examples of EU limits on incentive pay:
  • The Dutch capped bonuses for bankers, money managers, and other financial professionals at 20% of base salaries. 
  •  Entrepreneurs must navigate onerous tax rates and restrictions that often make equity sharing and options more trouble than they’re worth. 
  • When employees in Germany exercise options, they have to pay income tax on the difference between the fair market value and the strike price, that runs from 14% to 47.5%. They also pay a 25% capital-gains tax on additional profits when they sell their shares.
In contrast, American employees typically pay a 0% to 20% rate on capital gains when options are redeemed, ...

Chatterbug's COO, sums it up: “I wish we had the same system as the U.S.,” she says. “But they don’t want us to get rich in Germany.”

HT:  Gus B.

ADDENDUM:  when I ask my EU colleagues about the disparity, they point to other factors as well, like bankruptcy codes that discourage risk-taking.

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