What are the benefits and downsides of employee share schemes?

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• What are the benefits?
• What are the downsides?
• Conclusion

Would you like to provide non-cash incentives to your staff?

Would you like your staff to be shareholders, to encourage a sense of ownership and staff longevity?

Have you considered an employee share scheme?

An employee share scheme is defined by the Australian Taxation Office as “a scheme under which shares in a company are provided to an employee or their associate in relation to the employee’s employment.” Shares are offered by the company to an employee and employees can purchase shares up front, through a loan from the employer, or by way of salary sacrifice. There are benefits and downsides to participating in these schemes, and here we give you a quick summary of the good and the bad.

What are the benefits?

Employee share schemes help align the interests of employees with the employer and shareholders. This can be a good way for employers to retain and motivate their employees. It can improve productivity and workplace cooperation as employees feel that they have a direct interest in the performance of the company.  Having a financial interest can motivate employees to be proactive in helping the company grow.

The scheme can also be beneficial to the employees. In participating, employees can develop a greater understanding of how the company is run and have an improved awareness about the general direction of the company. In addition, it enables employees to achieve flexibility with their salary packages.

What are the downsides?

If the company is not listed, there may not be ready buyers for the shares, so the shares may not be perceived as high value by employees.

There are also tax implications for the employee.  The employee should seek advice on these before being issued with options or shares.

Some employees may feel that they cannot influence share prices, and as a result, the scheme holds less value for them.

Employers can often put limitations on when employees can buy or sell company shares. Generally, employees are only offered shares when the company decides that they are eligible. Once these shares are purchased, if the employee is paying the employer for these shares via a loan or other agreement, these shares may not be able to be sold until they are fully paid.

Employees need to understand how new issues take place. If the company is able to issue new shares without the consent of the employees, or the right for employees to purchase shares pro-rata, then employees will be diluted with each new issue, and the percentage they own is reduced.  However, if the value of the company is increasing, them their parcel of shares may be worth more, even though it is a smaller percentage.

Conclusion

There are many issues which may arise in employee share schemes. Whether you are an employer looking to reward and retain your employees, or an employee who is looking to own shares in your company, before you participate, you should discuss any issues of concern regarding your employee share scheme with a business lawyer to ensure that you fully understand the scheme and your obligations under it.