THE use of stock options and share grants as an employee reward tool got a boost from the Budget yesterday, with the government lifting restrictions on their use.

Larger companies will now be allowed to offer employee stock option and share award schemes as long as they offer these schemes to at least a quarter of their employees. Previously, they had to offer such schemes to at least half of their employees.

This brings them closer in line with the more relaxed requirements currently imposed on small and medium-sized enterprises (SMEs).

Finance Minister Tharman Shanmugaratnam said he recognised that 'some of our larger companies would like to use equity remuneration for key employees to encourage them to take risks and grow the company', but are currently restricted from doing so because they need to offer such schemes to at least 50 per cent of their employees.

The minister also introduced a new tier for start-up companies, besides the two current tiers targeted at SMEs and larger companies.

'As the risks involved in start-ups are naturally higher, it is reasonable to grant their employees a larger exemption from personal income tax on the gains they make on their stock options or share awards,' he said.

Singapore has progressively been encouraging the use of share-based employee remuneration schemes in recent years, in recognition of their growing popularity among companies - as a tool to motivate their staff.

Companies believe that stock option plans work to align the interests of employees with that of the company, while share grants allow staff to participate in the company's fortunes.

The government, in its 2006 Budget announcement, said that it would allow companies that have incurred an actual expense on employee share rewards - that is, those that go into the market to buy back shares, which are then held as treasury shares before being distributed to employees - to claim a tax deduction on this expense.

But there is no tax deduction when companies reward employees with the issue of new shares.