Thinking of Implementing an Employee Share Scheme? Here’s What You Need to Know

If it’s time to start thinking about implementing an Employee Share Scheme, just remember there’s no one-size-fits-all approach to what can be a complex arrangement.

There was a time when only the C-Suite of a major corporation would care about how an Employee Share Scheme was set up.

It’s simply not something the average Australian employee ever had to consider. 

But times have changed. 

These days, many businesses are using a variety of Employee Share Scheme structures to attract, retain, and even incentivise employees. 

That can be good news for employees who benefit from such arrangements—and complicated news for accountants.

So whether you’re implementing an Employee Share Scheme for your business, or you’re simply interested in the mechanics of setting one up, there are a few key points to consider.

What Sort of Employee Share Scheme Are You Setting Up?

That’s the first question you’ll need to ask yourself—not least because there are some notable differences between an average Employee Share Scheme (ESS) and what’s known as an Employee Share Options Plans (ESOP).

In short, a typical ESS allows employees to purchase or be awarded shares at a predetermined price on favourable tax terms.

There are some stipulations around them—including that workers must pay at least 85% of fair market value, and the shares must not be sold for a minimum of three years—but generally speaking, this is a fairly common set-up for many Australian businesses.

We’ve covered how a standard Employee Share Scheme works in the past, so it’s worth considering what some of the other options look like. They include:

• Options plans
• Performance rights
• Direct share offerings.

We take a closer look at all three options below.

Options Plans: Mixing Flexibility with Long-Term Incentives

Options plans are a popular choice for businesses looking to offer long-term incentives to their employees. 

Under an options plan, employees are granted the right—but not the obligation—to purchase shares in the company at a predetermined price, known as the exercise price, after a specific period or upon meeting certain conditions.

The Key Benefits of Options Plans:

• Aligning with Long-Term Goals: Options plans incentivise employees to focus on the long-term success of the company, as the value of the options increases alongside the company’s growth.
• Acting As a Retention Tool: The vesting period—which typically spans a few years— encourages employees to stay with the company to ultimately benefit from the options.
• Remaining Cost-Effective: With no initial cash outlay required, options plans remain a cost-effective incentive given that employees only purchase the shares when they exercise their options.

Things to Consider Before Implementing an Options Plan

When implementing an options plan, businesses need to consider a range of factors. These include the vesting schedule, exercise price, and the conditions under which the options can be exercised. 

It’s imperative to balance the overall attractiveness of the offer to employees with the potential dilution of shares. 

There’s also the obvious tax implications for both company and employee, which must be carefully managed to ensure overall compliance and tax efficiency.

Performance Rights: Rewarding Achievement and High Performance

Performance rights are another ESS option where employees are granted the right to receive shares at no cost, subject to the achievement of specific performance conditions. 

These conditions are typically linked to the company’s performance metrics such as revenue growth, profitability, or share price appreciation.

The Key Benefits of Performance Rights:

• They’re Directly Linked to Performance: Performance rights combine employee rewards with the company’s performance, ensuring employees are motivated to contribute to the company’s success.
• There’s No Cash Outlay for Employees: Employees receive shares at no cost—making it an attractive offer, particularly for high-performing employees.
• They’re Flexible to Design: Companies can tailor their performance conditions to align with strategic objectives, whether that be short-term targets or long-term growth.

Things to Consider Before Implementing a Performance Rights Plan

When designing a performance rights plan, you should be mindful to select performance metrics that actively align with the business’ strategic goals. 

The plan should also be structured to ensure it’s challenging yet achievable, and motivates employees without setting unrealistic expectations. 

Like options plans, the tax implications of performance rights are complex and require careful consideration to not only ensure compliance, but also to maximise the benefits for both the company and its employees.

Direct Share Offerings: Immediate Ownership and Investment

Direct share offerings involve offering shares to employees at a discounted price or for free—giving them immediate ownership in the company. 

This ESS option is often used as a broad-based scheme to allow a large number of employees to become shareholders, fostering a sense of ownership across a large group and driving buy-in with the company’s success.

The Key Benefits of Direct Share Offerings:

• Providing Immediate Ownership: Employees gain an immediate stake in the company, fostering loyalty and a sense of belonging.
• Generating Broad Participation: Direct share offerings can be extended to a wide range of employees—not just senior executives—promoting a culture of shared success.
• Fairly Simple Structure: Compared to other ESS options, direct share offerings are relatively straightforward to implement and understand.

Things to Consider Before Implementing a Direct Share Offering

When implementing a direct share offering, it’s important to determine factors like eligibility criteria, whether you’re offering any discount rates, and the conditions for holding or selling the shares. 

Businesses must also consider the impact on their share capital and ensure that the offering complies with all regulatory requirements. 

Given the immediate tax implications for employees, businesses should provide guidance to help employees understand the tax consequences and manage their obligations.

Still Not Sure How to Proceed? Talk to PrimeAdvisory

Implementing an Employee Share Scheme is not a decision to take lightly.

It requires careful planning, a deep understanding of the available options, and perhaps most importantly, a thorough assessment of your company’s objectives. 

There’s a genuine degree of complexity attached—particularly in terms of things like tax compliance, what sort of ESS best suits your needs, and overall alignment with business objectives.

That’s why you should talk to PrimeAdvisory before implementing any form of Employee Share Scheme.

We can help tailor your Employee Share Scheme to your specific business needs, and ensure it benefits both your business and its employees. 

From selecting the right option, to navigating the regulatory landscape and optimising tax outcomes, it’s vital to seek expert advice before setting up your ESS.

We can talk you through every element of implementing your Employee Share Scheme.

Thinking about an ESS? Email us at [email protected] to get started.