Variable pay: what’s that?

Posted on March 8, 2022, by Antonio Rodríguez

Disclaimer: on 10 December 2021, the Spanish Government announced a draft bill on Start-ups. The project aims to reduce the tax on Stock Options and, de facto, make Phantom Shares a thing of the past. It’s expected to be passed in June/July 2022 and, from that point, start-ups may offer Stock Options to their employees with a lower tax impact than what we’ll describe in the following post. Let's talk about variable pay.

Now’s the time to update this post with information.

The sections on “Perks”, both in our job offers and those of everyone else, particularly in those aimed at technical profiles and/or roles in start-up firms, are littered with words that aren’t very user-friendly, whether it’s phantom shares, stock options or RSUs. They’re concepts that shouldn’t be ignored because they represent pretty tempting bonuses to salaries.

It’s difficult to explain each of these methods well. Firstly, because our intention with this post is that you don’t need to have extensive financial or legal knowledge to understand them. Secondly, because each of them can be made as complex as you want, if you discuss tax issues, specific clauses and the minute details. Here comes the second disclaimer: we’ve tried to simplify them. We could undoubtedly be extremely precise in a 5,000-word post, but then nobody would read it.

To properly explain some of the forms of variable pay that are out there, we’re joined by Anxo Barreiro, Director of BV Asesores. It’s only thanks to his invaluable help that we can be sure we haven’t made any legal errors in the text. So here goes!

Variable pay by Anxo Barreiro

Thanks for giving me a bit of space in your paragraph on tax to explain a complex subject and one which can make up a significant part of someone’s salary. We’re going to focus on the two most common options, given that the other methods are variations of them, and which don’t present as many complex tax issues.

Stock Options

Stock options are a bonus payment that companies grant their employees, giving them the right to buy shares in the company at a set price. In a Stock Options contract, variables such as the exercise price (the price per share at which you can buy a stock option), vesting or lock-in period i.e., the time you have to stay in the company to earn Stock Options and whether you retain the right to buy them once you leave the company.

In listed companies, if the exercise price of the option is below the trading price on the expiration date, the employee may buy shares. Otherwise, you can retain your right without exercising it.

In the case of non-listed companies, you must decide if you want to exercise the right depending on the company’s future prospects, weighing it all up, as it requires an outlay and, above all, it carries a tax liability.

Double taxation

And the problem with stock options is that double taxation occurs:

1. At the time you exercise your right to buy, you have to be taxed on the difference between the payment that you make and the value of the shares that you hold at that time (although if the company is not listed on the stock exchange it is an illiquid asset—in other words, it isn’t easily convertible into cash). This is called a ‘payment in kind’ due to the company taxing you using the income tax rate schedule and you may have, where appropriate:

  • A right to a deduction of up to €12,000 in your tax return.
  • A potential tax reduction of 30% if it was over 2 years ago since you signed your contract until the option is exercised.

2. In the case of selling shares, you have to be taxed on the capital gains generated from point 1 to point 2; in other words, the difference between the value of the shares when you exercise your right to buy them until their subsequent sale. This tax goes by the savings rate by (19/21/23/26%).

The press release issued by the Government with regards the Start-ups Bill “promises” to eliminate the tax at point 1, in such a way that Phantom Shares would no longer make fiscal sense.

Phantom Shares

These are economic rights granted by the company to the employee where triggers or events are established (normally, liquidity events such as the sale or distribution of dividends) which give rise to the employee’s remuneration right. Hence, they are offered as an additional payment to employees in the early phases of a start-up company, making them stakeholders in the profits generated in a potential sale of the company.

In the same way as with Stock Options, it is normal to add a vesting period so that, if an employee stays for 1 month in their job, they don’t have the same economic rights as someone who stays for 2 years.

Talking tax terms, Phantom Shares are taxed as a whole using the income tax rate, as in section 1 of the Stock Options that we spoke about earlier, by up to 48%. In return, they are only taxed at the time of payment, which eliminates the fiscal inconsistency of having to be taxed on an illiquid asset.

Let’s talk numbers

Let’s give you an example with figures so it’s clearer to see.

Suppose that we have a net salary of €60,000 a year where we’re granted Stock Options or Phantom Shares. In the case of Stock Options, they give us 1,000 at an exercise price of €1 when their market value is €10 and, after buying them, we achieve an exit price of €20/share. 

In contrast, let’s suppose that we have 1,000 free Phantom Shares where we then achieve an exit price of €20/share. For the sake of simplification, let’s suppose also that the Stock Options granted do not give rise to any entitlement to a reduction as the specified regulatory conditions have not been met.

As we have a net salary of €60,000 a year, we’re going to assume that we’ll be taxed in our tax return by up to 45% (NB: This is simplified because you need to consider your autonomous community, family circumstances, other incomes, etc.) Tax:

Stock OptionsPhantom Shares
Tax in the financial year*€4,050
(10 - 1) x 1000 x 0.45
Capital gains tax on the sale of shares**€1,980
(20 - 10) x 1000 x 0.198
1000 x 20 x 0.45
Net profit***€13,970€11,000

*Tax in the financial year = (value of the shares - exercise price) x number of shares x Personal Income Tax

** Capital gains tax on the sale of shares: in the case of stock options, this is taxed in accordance with the savings rate; in phantom shares, the income tax rate is applied

*** net profit = income from investments - tax

Other forms of variable pay

Now we’ve explained the tax differences between Phantom Shares and Stock Options, it’s worth briefly explaining other basic concepts:


Restricted Stock Units are a form of stock options with voting and/or financial constraints.


The company’s Employee Stock Option Plan that you join upon signing the relevant contract.

Phantom Plan

The company’s Phantom Shares Plan that you join upon signing the relevant contract.


The generic name given to a bonus payment plan where the conditions are not specified. Normally it refers to a Stock Options plan.

Knowing these forms of remuneration can make you assess job offers in a different way where a pure and simple salary doesn’t seem so attractive, but when a juicy variable package is added to it, this can completely turn the whole salary on its head.With that, we hope to have shed a bit more light on the complex world of taxes and finances. If there’s any questions left hanging in the air, give us and Anxo a shout on Twitter.

Posted on March 8, 2022, by Antonio Rodríguez
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