Does offering an ownership stake have a future in domestic companies?

Although worker self-management is often despised today, and certainly rejected as an economic model, it has nevertheless continued to live on through a similar concept based on granting employees ownership rights in the company where they work. Such a form of employee participation is known as an Employee Stock Ownership Plan (ESOP) and is very common in companies organized as joint-stock companies.

If we look at local conditions, joint-stock companies are not particularly popular in Serbia because the minimum share capital is 3,000,000 dinars, they have a complex management structure, demanding reporting, and because the economy is not sufficiently developed. On the other hand, in limited liability companies (DOO), which are the most common form of business entities, shares cannot be acquired, nor can they be disposed of by public offering, as joint-stock companies can.

Hence, the possibilities for incentivizing employees in Serbia through ESOP were practically nonexistent. However, with regulatory amendments from 2019, as of April 2020 a mechanism has been in force that allows DOO to use ESOP as well. Naturally, this mechanism can be used both by startups that need money to finance projects and by investors who provide funds, but our focus will be on employee incentives.

What does the statistics say?

Formally, the mechanism is based on the owner of the share, i.e. the member of the DOO, setting aside a portion that the DOO acquires (reserved own share – RSU), for the purpose of later granting employees the right to acquire shares (PSU). Since this is an important change in the ownership structure of the DOO, there is an obligation to register the RSU with the Business Registers Agency, and the PSU, as a financial instrument, with the Central Securities Depository and Clearing House (CRHoV). Until the PSU is exercised, the RSU is practically frozen because the DOO has no voting rights on the basis of the RSU, nor are those shares counted toward the quorum of the general meeting. In addition, the RSU does not give the right to participate in profits.

After the RSU is registered, the DOO registers with CRHoV the conditions for acquiring the PSU. Specifically, the decision on the issuance of PSU defines, among other things, the number of PSU issued, the price the PSU holder pays to acquire the share, and the vesting date. Although the price is an important element of the decision, when it comes to employees it will usually be preferential or even symbolic (e.g. 10 dinars). As for the vesting date, it is a business decision of the employer that depends on internal HR policy or an agreement with the employee, and in domestic practice it usually ranges from one to four years.

As part of our preparation, we obtained information from the APR and CRHoV on the number of DOOs that registered RSUs, the industry structure of those DOOs, the number of PSU issuances, and the number of PSU holders. According to information as of February 9, 2022, only 12 DOOs had registered a total of 79 RSUs. The APR database does not make it possible to extract data on companies and members registered on the basis of the exercised financial instrument—the right to acquire shares in a reserved own share.

As expected, APR data show that computer programming (code 62.01) is the most common activity of the majority of companies that registered RSUs (nine in total). The remaining three are engaged in advertising agencies (code 73.11), fruit and vegetable processing and preserving (code 10.39), and research and development in other natural, technical and technological sciences (code 72.19). However, a subsequent analysis of the data held by CRHoV shows that these nine IT companies organized as DOOs are actually part of the same group.

ESOP is still not popular enough in Serbia

According to the CRHoV report with data as of March 8, 2022, there are a total of 104 issuances of PSU financial instruments (99 active and five canceled), and all PSU holders are natural persons. The difference between the data we received from APR and CRHoV arose because new RSUs, i.e. PSUs, were registered between February 9 and March 8.

A basic search by criteria of predominant activity (62.01 – computer programming), form (DOO), and active business operations shows that there are more than 3,200 registered companies. Hence, the total number of those that registered RSUs seems negligible, which leads to the conclusion that ESOP has still not gained sufficient popularity in the Serbian market. The reasons for this are very often a lack of information, both among employers and employees, about the possibilities for applying ESOP. Another reason could be that it is little known that there is a tax exemption when granting shares to employees, which could contribute to the popularization of ESOP.

Finally, in the long absence of concrete possibilities for applying ESOP, domestic companies have developed other options that are still quite common. For example, an employer can establish a subsidiary for key employees (joint venture), where the employee becomes a partner (holds an equity stake) in a joint project, and often receives a so-called “C level” position (CEO, CFO, CTO, etc.). In addition, blockchain technology makes it possible to achieve an effect similar to RSU and PSU through the issuance of tokens, which significantly speeds up projects and the engagement of people.

Given the chronic shortage of labor in the market, we can conclude that the time of ESOP is yet to come, and that employees will increasingly become owners of IT factories.