In Singapore’s tight talent market, equity-linked incentives are often the difference between hiring “good” and hiring “great.” Two of the most common tools are: (a) employee share option plans (ESOPs); and (b) phantom share plans (cash-settled awards that mirror share value without issuing shares). This article explains how they work, where they differ, and how to choose the right plan for your company from the Singapore law perspective.

Quick definitions

ESOP: the employee receives an option to buy actual shares at a set exercise price after vesting.

Phantom shares: the employee receives a contractual right to a cash bonus measured by the value or growth of the company’s shares; no shares are issued.

How ESOPs work in Singapore

Legal/regulatory: ESOPs are widely used by private and public (unlisted and listed) companies. Private companies typically need shareholder approval to create the option pool and issue shares upon exercise, and listed companies must comply with the SGX Listing Manual limits. Offering shares to employees usually falls within Singapore’s prospectus exemptions for employee share schemes, so a full prospectus is not required when conditions are met.

Tax (employees): In Singapore, gains from ESOPs are taxable as employment income, generally at the point of exercise (or when selling restrictions lift). For non-citizens who cease Singapore employment before exercise, “deemed exercise” rules can trigger tax at departure. Employers report such gains in regulatory compliance forms such as the IR8A.

Tax clearance for leavers: If a non-citizen employee leaves, unexercised options and unvested awards must be dealt with in the employer’s IR21 tax clearance process; IRAS provides a specific worksheet for ESOP/ESOW tracking.

Cap-table/Companies Act constraints: A Singapore private company must limit its members to 50, with employees and certain former employees not counted toward that cap. This information is useful for planning larger option pools without converting to a public company.

How Phantom Share Plans work

Legal/regulatory: Phantom share plans are contractual, cash-settled incentives pegged to share value. Because no shares are issued, companies typically do not need shareholder approval for new issuances, and the prospectus regime for offers of securities generally does not apply in the same way as share offers. Given that structure still matters, companies should obtain legal advice if plan terms resemble regulated derivatives.

Tax & CPF: Phantom payouts are taxable employment income when they vest (if vesting crystallises a cash entitlement) or when paid out, and, being cash remuneration, they generally attract CPF contributions for Singapore Citizens/PRs (subject to prevailing CPF rules and wage ceilings).

Side-by-side: ESOP vs Phantom Shares (Singapore context)

	ESOP (equity-settled)	Phantom Shares (cash-settled)
Ownership	Employee becomes a shareholder upon exercise; voting/dividend rights attach to issued shares.	Employee never becomes a shareholder; it’s a cash entitlement only.
Dilution	Dilutive on exercise; manage via option pool and shareholder approvals.	Non-dilutive; no share issuance.
Cash impact	No cash outflow to employees (other than admin/withholding), but may receive exercise price cash in.	Cash outflow on payout; plan becomes a compensation liability.
Tax (employee)	Taxed when options are exercised (or when selling restrictions lift). Deemed-exercise rules can apply to non-citizens who depart.	Taxed on vesting (if it creates a right to cash) or on payment. CPF generally payable on cash payouts.
Prospectus/approvals	Often covered by employee share scheme exemptions; still need shareholder approvals for issuances (esp. private companies/SGX rules).	Typically fall outside prospectus regime because no securities are issued; no issuance approvals needed.
Cap table	Adds members; employee members may not count toward 50-member limit for private companies.	No effect on members/cap table.
Talent messaging	“Real ownership” story; stronger long-term alignment.	“Cash upside” story; simpler to communicate and administer.
Admin/valuation	Need option pool setup, option agreements, board/shareholders’ approvals, ongoing cap-table & fair market value (FMV) / open market value (OMV) support for reporting.	Plan rules + periodic liability valuation; payroll/CPF and withholding processes at payout.
Fundraising/exit	Investors understand; aligns with market practice; must track dilution and investor consents.	Clean cap table for financing; but investors may prefer true equity alignment for key leaders.

Advantages and disadvantages

ESOP Advantages

• Alignment through ownership: employees become co-owners, benefiting from value creation post-exercise. This can be decisive for senior hires.
• Cash-conserving: helpful for startups that need to preserve runway.
• Accounting stability: equity-settled awards avoid balance-sheet liabilities and P&L re-measurements each quarter.

Trade-offs

• Dilution and shareholder approval processes (and investor consents) must be managed.
• Tax complexity for mobile employees (e.g., deemed exercise for non-citizens leaving Singapore) and annual Appendix 8B reporting.
• Admin burden: option pool design, FMV/OMV support for tax reporting, cap-table hygiene.

Phantom Shares Advantages

• No dilution, no cap-table churn: excellent for companies that want clean ownership and fast financing cycles.
• Simple narrative: “You’ll get a cash bonus linked to company value” is easy to communicate.
• Flexible design: tie payouts to EBITDA, valuation milestones, or exit proceeds without issuing securities.

Trade-offs

• Cash cost and P&L volatility from possible re-measurement under accounting rules; finance teams must model liquidity and earnings impact.
• Tax & CPF at payout/vesting increases payroll cash outlay and compliance steps.
• Weaker “ownership culture” than true equity, which may matter for C-suite retention.

Choosing the right plan (practical scenarios)

• Pre-seed/Seed–Series A tech startup seeking runway preservation and long-term alignment: ESOP is typically preferred. It’s market-standard for investor diligence, and employees value upside. Plan early for the option pool size and shareholder approvals.
• Bootstrap SME with tight cash, planning bank financing and wary of dilution: Phantom shares can motivate key staff without issuing shares or triggering shareholder caps. Budget the cash profile and understand CPF and tax timing.
• Later-stage scale-up preparing for institutional financing: a hybrid can work. For example, ESOP for leadership (strong alignment) plus targeted phantom awards for revenue teams tied to value milestones (cash-settled, no dilution). Ensure clean drafting to avoid regulatory issues.
• Cross-border teams with frequent moves in/out of Singapore: both regimes work, but ESOPs need special handling for departing non-citizens (deemed-exercise tests and IR21). Phantom plans may be simpler administratively but shift cash/liability risks to the employer.

Singapore-specific implementation watch-outs

1. Prospectus and corporate approvals: Offers under employee share schemes are commonly structured under statutory exemptions, avoiding a full prospectus. For phantom plans, no shares are issued (so no issuance approvals), but the plan must be drafted to avoid inadvertently creating regulated products. Private companies should minute board and shareholder approvals for ESOP pools and issuances.
2. IRAS reporting & valuation: Employers must report employee gains from ESOP/ESOW using Appendix 8B/IR8A and determine the open-market value (OMV) at exercise/vesting for taxation. Maintain contemporaneous valuation support (especially for private companies) and align grant letters with tax/reporting mechanics.
3. Mobile employees & tax clearance: For non-citizens, track grants, vesting and exercises. Deemed exercise may apply on departure; complete IR21 tax clearance and attach IRAS Appendix 2 to disclose outstanding equity awards.
4. Companies Act membership cap: Private companies must keep membership at ≤50; however, employees and certain former employees are not counted—useful when many employees exercise options. Keep your constitution and member register aligned.
5. Accounting policy and investor optics: Decide early between equity-settled (ESOP) and cash-settled (phantom).

Conclusion

• Choose ESOP when you want ownership alignment, a market-standard instrument for hiring senior talent, and no ongoing re-measurement noise in your P&L—while accepting dilution and the need to manage cap-table/process.
• Choose phantom shares when you prioritise non-dilutive incentives, clean ownership for financing, and simple messaging—while budgeting for cash payouts, CPF and P&L volatility.

Thinking of launching or upgrading your incentive plan?

28 Falcon Law Corporation advises founders, boards and HR leaders across the full lifecycle of ESOPs and phantom plans, from strategy and pool sizing, to plan rules and grant letters, IRAS/CPF and cross-border tax handling, and cap-table and investor approvals. We also coordinate valuations and set up practical workflows so your finance, HR and legal functions are aligned from day one.

Book a confidential consultation to design an incentive plan that attracts top talent, aligns behaviour with enterprise value, and keeps you compliant in Singapore, without surprises at audit, fundraising or exit.

This article provides general information only and is not legal, tax or accounting advice. Engage counsel for advice tailored to your circumstances.

Waltson Tan Director +65 8079 0028 waltson.tan@28falconlaw.com

Office address: 101A Upper Cross Street #13-11, People’s Park Centre Singapore 058358