Introduced under the Finance Act 2001, the new rules mean that a company can avail of significant tax breaks on new or existing employee share option schemes, subject to approval by the Revenue Commissioners.

This, combined with the pivotal position that the Eircom Employee Share Option Trust (ESOT) - which holds shares on behalf of Eircom workers - now holds, means that share options are now very much in focus.

Share options have rapidly emerged as important elements of employee remuneration in a growing number of Irish companies, particularly technology firms. They are widely viewed as a means by which employees can benefit directly from a company's financial success through personal ownership of stock options.

A share option gives an employee an option to buy shares at a set price. The employee may exercise this option at some point in the future when the value of the shares has risen, thereby making a gain.

Prior to the introduction of the new provisions, share options were subjected to a form of double taxation: if an employee (or an executive) exercised share options, income tax had to be paid on the difference between the option price and the market value of the shares when the options were exercised. Then, once the shares were sold, a capital gains tax of 20 per cent was payable on any profit made. These rules will still apply in the case of "unapproved" share option schemes. However, under the new approved scheme employees will not have to pay income tax on exercising share options but will only have to pay the capital gains tax at 20 per cent on the difference between the amount paid for the shares at the option price and the amount received on selling the shares.

To qualify for the tax treatment, employees must not dispose of any shares gained from exercising share options for three years from the date that the options are granted.

"The Revenue Approved Share Option Scheme provides a new range of opportunities to complement existing employee share schemes, including existing unapproved executive share options," says Ms Sheena Doggett, head of A&L Goodbody Solicitors' share schemes unit.

The need to "incentivise" employees very much underpins the rationale for the new tax treatment. Indeed, while the tax breaks in the Revenue-approved scheme will benefit employees financially, it provides even greater benefits for those executives designated as "key employees", i.e. those whose skills are considered vital to the company.

The scheme allows companies to grant up to 30 per cent of the options on a selective basis to key employees in one tax year, while the remaining 70 per cent must be granted to employees of the company on similar terms as a broad-based employee share scheme. Besides the income tax relief, companies can also avail of a corporation tax deduction for the costs of setting up an approved scheme.

While there has been some criticism of the approved scheme over its modest discrimination in favour of senior or "key" executives, most people say attracting and retaining key staff will often take more than just a decent salary.

The decision to introduce a new tax treatment for employee share schemes arose out of pressure from organisations such as as the Irish Software Association and the Irish Profit Sharing Association (IPSA), both of which are affiliated to IBEC, the employers' lobby group. The IPSA says now that the incentive exists to open up share option schemes to all employees, its focus is to encourage more companies to take advantage. For companies that already have employee share schemes, this may mean changing their policy to meet Revenue approval, according to IPSA director, Mr Cormac McConnell.

The Revenue Commissioners say they have so far received 10 applications for entry to the approved share option tax regime. However, none has been approved yet. Of these applications, four are newly established schemes, while the remainder are existing unapproved share option schemes seeking to be converted to the approved scheme. Employee share options are not the whole story when it comes to facilitating greater financial participation and investment by a workforce in their company. Employee share ownership schemes can be divided into those that are Revenue-approved and those that are unapproved.

There are currently 401 Revenue-approved profit-sharing schemes in existence, which are trusts that companies pay money into on behalf of employees. The trust then buys shares in the company for the employees and retains them for a period before distributing them to employees.

There are 76 SAYE (save as you earn) schemes. Under these schemes, an employee agrees to save between £10 and £250 per month over three or five years to fund the exercise of an option, which may be priced at a discount to market value.

There is an unspecified (but growing) number of unapproved share option schemes, which are often the choice of many smaller, private companies, including technology companies.

There are six employee share ownership trusts (ESOTs), which are used to enable shares in a company to be allocated to employees over a period of time. These are the kind likely to be found in large semi-state companies that are undergoing major changes and restructuring, such as TSB, Eircom, Aer Lingus and An Post.

Indeed, the success of Eircom and An Post in negotiating employee shareholdings of up to 15 per cent in exchange for various company changes has highlighted how employee share schemes can increase worker influence on corporate governance, along with other non-financial advantages.

Business and economic adviser Mr Paul Sweeney says that workers are becoming very well informed about their company's business. "I see a big increase in business knowledge by workers over the next few years."

Mr Sweeney, who is currently involved in negotiations for a private sector company on an employee share scheme, says that the new Revenue-approved share options scheme will not suit every company.

"The Revenue forces such inflexible structures on it that it's worth forgoing the tax breaks just to have a system that will work," he said.

Nevertheless, tax breaks or no tax breaks, the risks will still remain, as many employees in technology firms will have recently found to their cost. "There was an extraordinary air of unrealism out there, said Mr Sweeney. "Today people are much more in tune with reality and I think that's good all round.