Employee Share Schemes: What to Consider? - JHK Legal Commercial Lawyers

12 June 2024

Employee Share Schemes: What to Consider?

Written by Sarah Jones

Employee Share Schemes are becoming more popular in Australia as a retention and reward strategy for key long-term staff.

But, what are they?

So, what is an Employee Share Scheme (ESS)? It is a plan or agreement put forward to a key group of employees to become shareholders in a company. The idea behind such a scheme is to reward key staff, while also aligning their interests with the company’s as a whole.

There are a number of different ways that Employee Share Schemes can be set-up and maintained, so it is important, whether you are the business owner or the employee being targeted, that you seek legal and financial advice as to the consequences of the option(s) on the table.

Businesses: what should you be considering?

You must think about the following matters when considering whether an Employee Share Scheme is right for your business:

  1. Short-Term vs. Long-Term:
    • Generally, an Employee Share Scheme is a long-term play and you are not likely to see the benefit of it for some time; in this way, it is similar to many other retention strategies. If you are looking for short-term benefits for either your staff or your business, this might not be the right route;
  2. Attraction & Retention of Staff
    • What type of staff do you want to attract and retain, and how are they best approached? Some staff have no interest in ownership of the company they work for, while others may be very invested. It is important that you consider the make up of your own employee group and what their goals are before assuming this option is the right one for you;
    • Further, you should consider what the ultimate outcome will be if that staff member resigns or sells. For example, you might consider whether to implement a period of time the shares will be “locked” before a larger benefit can be received.
  3. Expectations
    • Sometimes, the opportunity to own shares in the company and/or receive the pay off from their hard work in the form of dividends when the company makes a profit is a game changer in the way someone will think and behave about their role.
  4. Control
    • While attracting and retaining key staff is very important for a business, some business owners (particularly small business owners) will not want to give up control of their business or allow their ownership stake to be diluted. You should consider:
      • Are you willing to reduce your ownership stake in the business?
      • Are you willing to potentially reduce your profits taken from the business personally? Be aware, it is possible that your businesses’ profits will increase with the strategised increase in attraction and retention of staff;
      • What controls are you willing to give up? Many Employee Share Schemes limit the voting rights of the employee share.
  5. Limitations
    • There are still limitations on what can be offered to each employee in a 12-month period. You must make sure to obtain appropriate advice about what you can offer;
    • Employees will have financial limitations. You must make sure to obtain appropriate advice about what best to offer in terms of:
      • Buy-in by an employee. Can a discount be offered?
      • As of right to an employee. What are the tax consequences (for you and for the employee)?
  6. Tax matters
    • Employee Share Schemes continue to have many different iterations and therefore many different potential tax consequences. While the Australian Government has committed to streamlining ESS tax matters, it will be important that you work with your accountant so you are aware of the obligations at the outset and can make appropriate decisions accordingly.

Employees: what you should be considering?

As an employee, the opportunity to participate in an Employee Share Scheme can be exciting. However, you will want to consider a few things before continuing down this path:

  1. Expectations for the role
    • An employer is likely to want to see some dedication/alignment with your interests and the business as part of this process. You should ask yourself: is this likely to change how you currently work or how you think you currently work?
  2. What is on offer?
    • Employers can offer a number of different types of Employee Share Schemes, so you should not assume the one on offer to you is the same as the one you read about or heard about recently. You should check/review:
      • How is it expected that you will obtain the shares? Are you expected to buy in?
      • What voting rights will you have (if any)?
      • Is there a dividend policy and/or financial information which can show you the likelihood of regular dividends?
      • Is this likely to affect your salary moving forward and/or is this being offered instead of a bonus or other benefits?
      • What does the agreement you’re being asked to sign look like? Does it include any warranties from the employer or any restraints on you?
  3. What happens if things change?
    • If you become a shareholder of the company, it is likely that the ESS will have particular expectations about longevity of your tenure. Therefore, it’s important to consider and check what the employer’s expectation is if you decide to resign and/or sell your shares.
  4. Tax Consequences
    • There will be tax consequences for any type of Employee Share Scheme, so you should make sure to seek financial advice prior to signing.

In Summary

Employee Share Schemes can be a very successful plan between employers and employees; and it’s important to consider and discuss the relevant elements early so that all parties know what the expectations and potential outcomes are likely to be.

For More Information

For more information on Employee Share Schemes or should you have any questions on how to set-up an ESS structure, please contact our JHK offices.