Introduction to Employee Share Plans (ESPs)

14 Feb 2024

In Australia, Employee Share Plans (ESPs) are a highly effective method to motivate your employees to be more productive and efficient in their work, as they will be directly benefiting from the company’s success. This makes employee share plans a popular choice for businesses looking to expand in and outside of Australia.

Implementing share schemes for employees can help organisations achieve their goals faster, increase productivity, and retain top talent.

Whether you are looking to design and implement employee share schemes, or looking for a service provider for ongoing administration, BoardRoom’s dedicated employee share plan division have the expertise and experience to support your organisation’s needs.

Importance of Employee Share Plans (ESPs) In Attracting and Retaining Talent

In today’s competitive job market, candidates are not only looking for a good salary and benefits package but also for long- term incentives and opportunities for growth. Offering employee share schemes can make your organisation more appealing to potential employees in Australia as well as showcasing your commitment to your employees’ success and growth.

From a talent retention perspective, the idea behind employee share plans is to tie their compensation to your company’s success. As your company grows and its stock value increases, employees can benefit financially. This can also help align the interests of your employees with your company’s goals, leading to a more motivated and committed workforce.

Moreover, ESPs can also help in talent retention by creating a sense of loyalty and commitment towards your company. When employees have a stake in your company’s success, they are more likely to stay with you for the long term, leading to a stable and motivated workforce.

How Employee Share Schemes Works

Employee share schemes typically involve your company offering your employees the opportunity to purchase shares of your company’s stock at a discounted price. This is usually done through a stock purchase plan or a stock option plan.

In a stock purchase plan, employees can use a portion of their salary to buy company stocks at a discounted rate. These stocks are often held in a trust until that employee leaves the company, at which point they can sell the stocks for a profit.

As for stock option plans, employees are given the option to buy company stocks at a predetermined price within a certain time frame. Therefore, employees have the opportunity to purchase stocks at a lower price and potentially make a profit if your company’s stock value increases.

Types of Employee Share Plans

Long-Term Incentive Plans (LTIPs) are performance-based compensation programmes designed to reward employees for their contributions to a company over a period of time. These plans are typically subject to vesting periods. Vesting may also tied to the achievement of performance milestones. LTIPs exist may include a combination of equity-based and cash-based incentives.

Here are some common forms of equity-based long-term incentive plans:

Employee Share Option Plans (ESOPs)

Employee Share Option Plans, also known as stock option plans, give employees the option to purchase company stocks at a predetermined price within a specific time frame. These options are usually granted as part of an employee’s overall compensation package.

One of the main benefits of ESOPs is that they provide your employees with the opportunity to buy stocks at a lower price than the current market value. This creates a potential for financial gain if the company’s stock value increases in the future. However, if the stock value decreases, the employee is not obligated to exercise their options.

ESOPs are typically offered to key employees, such as executives or high-performing staff to reward and retain them. These share option plans can also be used as an incentive to motivate your employees to work towards the company’s success, as their financial gain is tied to the company’s performance.

Restricted Stock Units (RSUs)

Restricted Stock Units are a form of equity compensation where employees are given a certain number of shares that will vest over time, typically over a period of a few years. Unlike ESOPs, RSUs are given to employees as a grant and do not require any upfront payment. However, employees will only receive the shares once they have met the vesting requirements, such as staying with the company for a certain period or meeting performance goals.

RSUs provide your employees with the opportunity to own a portion of the company’s stock without any financial risk. The value of the RSUs is tied to the company’s stock value, so employees have a vested interest in the company’s performance.

Employee Stock Purchase Plans (ESPPs)

Employee Stock Purchase Plans are a type of employee share plan where employees can use a portion of their salary to purchase company stocks at a discounted price. These plans are typically offered to all employees, rather than just key employees.

ESPPs usually have a specific enrolment period during which employees can choose to participate. The funds for purchasing the stocks are taken from the employee’s salary, usually on a pre-tax basis. Once the stocks are purchased, they are usually held in a trust until the employee leaves the company, at which point they can sell the stocks for a profit.

Implementing Employee Share Plans

Implementing employee share plans as part of the organisation’s LTIP involves careful consideration of various factors to ensure its success.

Aligning with organisation’s strategy: The objectives and goals of the plan should be clearly defined and aligned with the organisation’s overall strategy. This will help in determining the type of plan that will best suit the organisation’s needs.

Eligibility criteria: Ensure that the eligibility criteria are fair and transparent to avoid any potential issues. This could include factors such as length of service, job level, or performance criteria.

Communication: Clear and effective communication of the plan’s details and benefits is essential to ensure employee understanding and participation.

Compliance: Another important consideration is the tax and regulatory implications of the plan. It is crucial to seek expert advice and ensure your ESP is complying with all legal and tax requirements to avoid any potential issues.

Tax Implications of Employee Share Plans

For employees, the main tax implications of employee share plans are related to income tax and Capital Gains Tax (CGT). In Australia, when an employee receives stocks from your company, they may be subject to income tax on the value of the stocks at the time of vesting or exercise. This means that he or she will have to pay taxes on the value of the stocks as part of their regular income.

Also, it’s crucial for the employee to consider the potential impact of Capital Gains Tax (CGT). Selling the shares immediately after they vest, within a 30-day window, generally doesn’t incur CGT. However, if he or she waits longer than 30 days to sell, CGT obligations may arise.

Why Choose BoardRoom?

Consider BoardRoom as your provider for employee share plans in Australia. With over 50 years of industry-leading experience and expertise in implementing employee share plans in Asia-Pacific, we have managed over 7,300 clients. With a deep understanding of the local market in Australia, we can provide tailored solutions to meet your specific needs.

Besides Employee Share Plans, BoardRoom also offers a comprehensive range of services, including: