Employee share schemes

Sharing the wealth

As an employee of a company, you may be invited to participate in an employee share scheme. There are a number of things to consider before signing up.

Here we explain how these schemes work and the pros and cons.

How employee share schemes work

Employee share schemes (also known as employee share purchase plans or employee equity schemes) give employees shares in the company they work for, or the opportunity to buy shares in the company.

Share purchase plans offer eligible employees the chance to purchase shares, sometimes through a loan from their employer. The shares are often paid for through salary sacrifice over a set period (for example, 6 months), or by using the dividends received on the shares. Some share purchase plans also allow employees to pay for the shares in full, up front.

Employees on higher incomes are often eligible to receive shares as a performance bonus, or as a form of remuneration, instead of receiving a higher salary.

The share schemes of larger companies usually offer employees 'ordinary shares' that provide an equity investment in the company. However, smaller companies may only offer 'pseudo' equity schemes that pay dividends but do not give employees the rights associated with traditional share ownership, such as the right to vote at annual general meetings.

The benefits

Employee share schemes are a way of attracting, retaining and motivating staff as they align employees' interests with shareholders' interests. Employees can benefit financially if the company performs well.

The shares might be offered without a brokerage fee or at a discount to the market price. There may also be tax benefits but this will depend on the employee's financial situation and the unique features of the share scheme.

The drawbacks

There are often limitations on when employees can buy, sell and access shares through their company's share scheme.

There may only be an annual window during which shares can be bought or sold. Employees may also have to get permission from the company before buying or selling the shares.

If the employee is paying back the cost of the shares over a period of time, they do not have the right to sell them until they have been paid for.

Even if the shares have been paid for, some companies may insist that employees give back their shares when they leave, or sell them at the current market price, even if that price is less than what they paid.

Some share packages come with restrictions, where employees only receive part or all of the shares if certain performance targets are met, and they remain with the company for a certain number of years.

Case study: Michael buys shares in his company

""Michael was offered shares in his company that was being listed for the first time on the stock market. As he had been at the company for 5 years, he was offered 3000 shares to buy. Other people who had been there a shorter time were offered less shares. Employees were offered the shares at $1.20 which was a bit cheaper than they were to be listed on the stock market. There were rumours going around the company that the value of the shares could go up to $9 once they were listed. Michael bought all 3000 shares ($3600 worth of shares) he was offered as he felt excited to have a stake in the future of the company. It made him feel like more than an employee.

The shares did well when they were first listed, reaching a peak of $8 after a few months. After that the share price slipped quickly. Luckily Michael sold his shares after 6 months at $2.40 so he doubled his money. A few years later the owner of the company bought out the minority shareholders at 50c per share when the company was delisted from the stock market.

Things to consider

Before you decide to participate in an employee share scheme you should do some research about the company to determine how well it is doing and whether the shares are likely to increase in value. See choosing shares to buy for more information.

If you decide to purchase the shares, it's important that they're part of a diversified investment plan to avoid losing a large part of your investment portfolio if your employer goes out of business. For more information, see investing basics.

It's also important to consider your own personal circumstances. For example, you may have other priorities for your money like paying off your mortgage or contributing extra to super.

Each employee share scheme is different, so you should carefully read the offer documents, which set out the terms and conditions of the offer. Look for information about when you can buy and sell the shares, whether you are entitled to dividend payments, and what happens to the shares if you leave the company.

Speak to an accountant or a financial adviser if you need professional advice. See also the Australian Taxation Office (ATO) information on employee share schemes.

Employee share schemes can be a great way of gaining access to discount shares, however you should think about how they fit into your investment strategy before you decide to get involved.

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Last updated: 23 Mar 2016