Employee share schemes: Is loyalty worth it?


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Employee share schemes are where employees are either given shares in the company they work for, or the opportunity to buy shares in the company.

While they take significant accounting and legal input to set up, virtually all listed and many private companies have employee share plans in place.

For companies, a key benefit of having an employee share plan is the way it helps align the interests of its employees with its own interests.

employee share schemes loyalty

When employees own shares in the company they work for, they're likely to work harder. They will be more interested in helping their company flourish, so its share price rises, than a non-shareholding worker who's likely to be more focused on bundying off.

Shares are also offered to employees, particularly at higher-income and executive levels, as a form of remuneration in lieu of receiving a higher salary - which helps the company's cash flow requirements.

Some share packages, which frequently feature stock options, come with restrictions, where the employee only receives part or all of the shares if he or she meets certain performance hurdles, and remains with the company for a specified number of years.

The way these share schemes are structured effectively serves as a carrot to encourage greater employee loyalty, motivation, productivity and retention.

A share scheme commonly offered to lower-income employees is a share purchase plan. Here, employees contribute to the cost of the shares, investing up to 15% of the value of their salary (usually using salary sacrifice) over a period, for instance six months.

The sweetener is the employee receives the shares at a discount to the current market price, often around 15% less. The benefit to the employee, clearly, is getting shares at a discount; the benefit to the employer is a more committed workforce.

Paul Bailey, tax principal at Deloitte, says: "You don't really have to convince anyone about the benefits of share plans; it's self-evident.

"Engaged employees want to have a stake in their company - surveys and everything else show that. And it's good for the businesses these employees work for."

An important feature of employee share plans is the way the shares are taxed. It's an area that's seen a lot of attention and government backflipping since the May federal budget. The legislation is being reviewed and may be finalised during this spring's sitting of parliament.

At the time of writing, employees who earn less than $180,000 can receive up to $1000 worth of their own company's shares a year, tax free (they don't have to declare these shares as income or pay tax on their value). This appeals to many employees.

Also at the time of writing (and with certain qualifications) payment of tax can be deferred for salary sacrifice-based employee share schemes offering no more than $5000 worth of shares to employees each year. Employees can defer the payment of any tax on them until the shares vest (when employees own them unconditionally), or are held for up to seven years.

In the May budget it was announced the popular practice of tax deferral on employee share schemes would be abolished, a measure designed to raise more tax now and help stop fat cats rorting the system.

Justine Turnbull, employee relations partner at Freehills, says: "The government clearly did not consult sufficiently before the budget announcement and the whole thing backfired, largely because the union movement was outraged ...

"There was also huge objection from companies, and many have suspended their employee equity [share] schemes."

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Chris Walker was a business writer and co-founder of Corpwrite, a boutique content marketing and public relations agency. He was a regular contributor to Money magazine from its establishment in 1999 to his death in 2016.