Incentive schemes in Norwegian employment relationships

1 INTRODUCTION

Incentive schemes have become an increasingly important tool for Norwegian employers seeking to attract, retain and motivate key employees. The choice of scheme is influenced by, among other things, the company’s stage of development and maturity, its shareholder structure and the employees’ risk profile, and may have significant legal and tax implications for both the company and the employee.

2 MAIN TYPES OF INCENTIVE SCHEMES

There are several types of incentive schemes, including salary bonuses, share options, reverse share options and synthetic shares. The most common schemes used in Norwegian employment relationships are outlined below.

2.1 Salary bonus

Entitlement to a bonus and its amount are typically linked to measurable Key Performance Indicators (KPIs), based on the company’s performance and/or individual factors relating to the employee. Bonus schemes entail no risk exposure for employees, as they only provide financial upside when the defined targets are met.

Bonuses are taxed as salary, and the employer must pay employer’s national insurance contributions. Bonuses also trigger entitlement to holiday pay and pension contributions. This results in a significant cost for both employer and employee compared with, for example, share-based schemes.

Bonus schemes provide direct motivation where achievable KPIs are used and the timeframe for potential realisation is short.

A disadvantage is that the employee bears no financial risk linked to the company’s performance, which may make the scheme less attractive from the shareholders’ perspective.

2.2 Share options

Share options are the most widely used incentive scheme in Norwegian companies, particularly in growth companies and start-ups. Each option entitles the holder to acquire or subscribe for one share at a predetermined price (the strike price).

The options vest based on the passage of time or the fulfilment of KPIs. There is normally no payment upon grant, and the employee only pays the strike price upon exercise. If the strike price is lower than the market value at the time of exercise, the difference is taxed as salary and the company must pay employer’s national insurance contributions on this benefit. The market value of the shares must be determined on a case-by-case basis and does not necessarily correspond to the price used in the most recent share issue or as stated in an external valuation. When determining the market value, account is taken of, among other things, value-reducing factors such as minority ownership, limited liquidity and disposal restrictions in the shareholders’ agreement to which the option holders must adhere.  

For private individuals, gains on the sale of shares are taxed as capital income. The gain is adjusted upwards by a factor of 1.72 (for the 2026 tax year) before being taxed at the standard income tax rate of 22 per cent, resulting in an effective tax rate of 37.84 per cent. Losses are tax-deductible. For investment companies, the exemption method applies, meaning that gains on the sale do not trigger tax. However, upon withdrawal from the investment company, the effective tax rate is 37.84 per cent.

A special option taxation scheme applies to employees of start-ups that meet specific conditions relating to the company’s age, number of employees, turnover and balance sheet total. Under this scheme, gains on the shares are taxed as capital income (37.84 per cent) only upon realisation, and the employer is not required to pay employer’s national insurance contributions on the benefit received by the employee. However, the qualifying conditions are strict, and in our experience, many companies considering share option schemes will fall outside the scope of this scheme.

The main advantages are that employees do not need to commit capital at the time of grant and have no financial exposure prior to exercise. The timing of exercise can also be coordinated with exit events.

The disadvantages are that the scheme does not fully align with the shareholders’ risk exposure and that any increase in value between grant and exercise triggers income tax and employer’s national insurance contributions. In the event of poor company performance, the motivational effect may also be weakened.

2.3 Reverse share options

Under a reverse share option scheme, the employee acquires all shares at the time of vesting, but the right to retain the shares is contingent upon the fulfilment of KPIs. If the targets are not met, the shares must be sold back at cost price, in which case the employee will not realise a gain or be entitled to a tax deduction for any loss in value during the holding period.

Purchases below market value trigger income tax and employer’s national insurance contributions. Otherwise, the tax treatment follows the same principles as for traditional share options.

The advantage is that the scheme fully aligns the employee's incentives with the shareholders’ risk exposure. The scheme is particularly advantageous when the initial value is low, as the entire increase in value is taxed as a capital gain (37.84 per cent) without the company being required to pay employer’s national insurance contributions.

The disadvantages are that the purchase price must be paid at the time of entry (although credit may be granted) and that the employee bears the risk of negative performance, including the risk of being required to sell the shares back at cost if the KPIs are not met.

2.4 Synthetic shares

Synthetic shares are a contract-based scheme where the invested amount increases or decreases in value in line with the performance of the company’s shares, without the holders acquiring shareholder rights. The scheme can be combined with vesting and KPIs. As it is contract-based, there is a high degree of flexibility in its design.

The purchase of synthetic shares at a value lower than the market value of the actual shares constitutes a taxable benefit that triggers income tax and employer’s national insurance contributions. For private individuals, gains on the sale of synthetic shares are taxed as capital income at 22 per cent. As synthetic shares do not qualify as "shares’ within the meaning of the Tax Act, the adjustment factor of 1.72 does not apply, resulting in a lower tax rate than for actual shares (37.84 per cent). For synthetic shares held by investment companies, the gain is taxed as ordinary income at 22 per cent, as the exemption method does not apply.

The advantages include flexibility for both employer and employee, simpler administration when joining or leaving the scheme — as holders of synthetic shares do not have shareholder rights — as well as a favourable tax rate on capital gains.

The disadvantages include a degree of complexity upon realisation, as well as the risk that the favourable tax regime may be subject to future legislative change.

2.5 " The Kruse Smith model"

Under the Kruse Smith model, employees purchase shares at market value but pay only a portion of the purchase price (typically 10–15 per cent) at the time of acquisition. The remaining amount is payable only if the shares are subsequently realised at a value exceeding the purchase price.

If the shares are acquired at a value lower than the market value, income tax is triggered on the benefit and the company is obliged to pay employer’s national insurance contributions on the benefit.

The Supreme Court has held that a model where only part of the purchase price is paid at the time of acquisition does not mean that the shares are deemed to have been purchased at a discount with immediate taxation of the difference. Rather, the remaining purchase price is regarded as a seller’s credit. To avoid taxation of the interest benefit on the credit, interest must be paid at a rate at least equivalent to the standard tax rate. If the seller waives payment of the remaining consideration, the waived amount is taxed as salary.

The advantage of the Kruse Smith model is the limited liquidity requirement for employees at the time of purchase and the fact that any increase in value is taxed as capital income without employer’s national insurance contributions. The disadvantages include the risk of a fall in value, ongoing interest costs, and the fact that any waiver of the residual payment will be taxed as salary, with the associated obligation for the company to pay employer’s national insurance contributions.

3 FORMAL REQUIREMENTS AND PRACTICAL ADVICE

Once the most suitable type of incentive scheme has been identified, it must be implemented correctly.

Incentive schemes must be designed in accordance with the Working Environment Act and the Tax Act. All schemes should be thoroughly documented through relevant company resolutions, grant agreements, option agreements and shareholder agreements. In the case of share-based schemes, employees’ rights and obligations must be regulated in the shareholders’ agreement, including any voting restrictions, transfer restrictions, the obligation to sell shares upon leaving the position (good/bad leaver provisions), tag-along and drag-along rights in the event of a sale of a majority of the company’s shares, and any rights to sell the shares to the company or other shareholders at a future date.

The decision-making requirements vary depending on the type of scheme. Salary bonus schemes are approved by the board, and separate bonus agreements are normally entered into. Share options and reverse share options require, where shares are not to be purchased from existing shareholders, a resolution by both the board and the general meeting. It is often appropriate for the general meeting to authorise the board to carry out a subsequent capital increase in connection with the issue of shares. Synthetic shares are contract-based and do not affect the share capital. The board may therefore adopt the scheme without a resolution by the general meeting, but should consider informing the general meeting depending on the scope of the scheme.

Practical considerations that should be taken into account include clear rules for handling incentives upon termination of employment, assessment of the use of an investment company for employees’ investments, effective communication with employees regarding the scheme’s operation and risks, as well as ongoing administration of vesting, tax deductions and reporting. For companies subject to financial regulatory frameworks — including specific rules on remuneration schemes and associated guidelines — the choice of structure and the scope of the scheme must also be assessed against the specific requirements arising from such regulations.

4 CONCLUSION

A well-designed incentive scheme can be a valuable tool for attracting, retaining and motivating key employees. The key considerations when choosing a scheme relate to the degree of risk exposure for the employee, the tax treatment of gains (payroll tax versus capital gains tax), liquidity requirements upon entry, and administrative complexity. The choice of scheme must be tailored to the individual company based on its circumstances, what motivates the employees, practical considerations, and the expectations of employees and existing shareholders. Regardless of the scheme chosen, thorough legal advice, proper documentation and clear communication are essential.

AGP has extensive experience with incentive schemes in employment relationships. We assist in designing and implementing schemes tailored to your company’s specific needs and circumstances.

Please feel free to contact us for a no-obligation discussion.

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[Disclaimer: This article provides a general overview of incentive models and certain key tax implications. The descriptions are simplified and accordingly certain legal details have been omitted, although these may be material. This article does not constitute legal advice. Readers considering the implementation of incentive schemes should consult a legal adviser for a proper assessment.]

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