Frequently asked ESO questions by employers
Substantial changes to the taxation laws governing employee share schemes have been announced in the 2008-09 Budget. These changes are not reflected in the information provided on this site or in the 'Getting Started' kits. You should therefore seek information and advice from a suitably qualified tax professional.
What is an employee share ownership plan?
An employee share ownership plan (ESOP) is a scheme that provides employees with a financial share in the company they work in. ESOPs allow employees to gain shares in the company they work in so that the employees benefit financially when the company performs well.
ESOPs are introduced for a variety of reasons. A common goal in introducing an ESOP is to align employee/employer interests to motivate and retain valued employees. ESOPs can take many forms, depending on the company size and type, and the organisation’s aim for introducing the scheme.
In deciding which ESOP will best suit your business, employers need to think about things like the business’s aim in introducing an ESOP; fitting the ESOP into a broader employee participation or remuneration plan; and the conditions that will be attached to the scheme.
See Planning and developing an ESOP - a guide for employers for more information.
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What benefits can I expect from an employee share ownership plan (ESOP)?
Generally, employers choose to introduce an employee share ownership plan (ESOP) for one or more of the following reasons:
- to align employee and employer/shareholder interests
- to motivate employees and to improve organisational competitiveness, productivity and efficiency
- as a long term strategy to retain valued staff
- as a form of employee participation and employee reward
- to provide tax effective financial participation
- as a method of succession planning in small businesses
- as a move to privatise a company or government entity.
ESOPs can be used as a tool to improve employer/employee relations or to foster a cultural change. ESOPs can also be used as part of a remuneration plan as an employee performance incentive. In addition, ESOPs may be used as a method of succession planning or employee buy-out.
What are the benefits of employee share ownership plans (ESOPs) for employees?
Employees benefit from employee share ownership plans (ESOPs) in a number of ways. Some of the main benefits include:
- a sense of commitment and a stronger relationship with their workplace
- greater job satisfaction through receiving tangible rewards for their performance
- a feeling of ‘ownership’ of the company – a degree of participation in the company and a voice in the business as a shareholder
- increased flexibility and choice when negotiating workplace arrangements
- a tax efficient way of acquiring shares and the opportunity to earn a substantial capital sum.
Employees may also gain a greater understanding of the stock market and factors that influence the performance and prosperity of the business.
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How can I use an ESOP to most effectively motivate my staff?
Staff motivation is only one of a number of reasons why a business may implement an ESOP. Other reasons may include staff retention, performance incentive, bonding of interests, recognition of key corporate milestones, wealth creation and tax concessional remuneration. Some of the key elements in offering an ESOP you should consider include:
Employee participation
If high participation rates are important, then the offer should have little if any cost to participants. If the plan is to focus on the achievement of specific targets and goals then the type of plan used may vary. Plan design is a critical aspect of any ESOP strategy, but remember an ESOP is only one element in motivating employees. Other methods might include improved training and development, individual recognition programs, improved work place environments, and rewards and benefits, such as cash, travel or days off. An ESOP must be developed as part of an overall HR and Remuneration Strategy.
Remuneration strategy
Employers should think about ESOP in the context of a total ‘remuneration strategy’. There are three components to a balanced remuneration strategy: fixed remuneration (including base salary and benefits), short term incentives and long term incentives. Usually, an ESOP will be used for long term incentive purposes, although many ESOP are also used for short term incentives, in particular 'salary sacrifice' plans. The particular plan used will vary depending on the remuneration and incentive purpose.
Aims of organisation
Employers need to design their ESOP to reinforce the aims of the business, as reflected in the formal business plan.
Communication
It is vital to effectively communicate the design and progress of the ESOP to employees. Employees need to know why they are receiving shares; the benefits of participating in the scheme; the link between their participation and the business’ wider strategy; and how their performance will affect their shares (if they perform well will they receive more shares? If the company becomes more successful, how will that affect the share price? How can they track the progress of their shares?).
This information needs to be communicated in a clear and easy to understand manner. It is also important to keep up communication with staff after the initial offer and information presentations are made.
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Yes. Profit-sharing, gain-sharing and other target based incentive plans are forms of financial participation that can be used to motivate staff.
Profit-sharing involves employees receiving a bonus, in direct relation to the business’s profits. It involves allocating a cash bonus to employees on the basis of the business’s profits. Profit-sharing schemes are often used for situations in which all, or at least a majority of employees, participate. Profit sharing is designed to motivate employees to work more productively to improve the overall success of the business, as reflected by profit.
Studies have shown that properly designed profit-sharing arrangements can be associated with higher productivity levels and improved organisational performance.
Gain-sharing is a group incentive scheme where employees receive a bonus, usually as assessable income, relative to the performance of the group. The performance may be based on cost savings, productivity improvements or some other measure. It differs from profit-sharing since profits may vary independently of employee and/or team performance. For example, a group of employees may achieve cost savings through better working methods, but the company’s profits may simultaneously decline through recession, other poor performing divisions etc
Research shows that gain-sharing can lead to a reduction in both grievance rates (i.e. formal written complaints made by employees) and absenteeism. This is an indication that gain-sharing is not only a financial incentive but also has the potential to improve relations between workers and managers. Research also indicates that gain-sharing can contribute to improved performance, particularly when it includes measures like employee involvement in the development of the plan.
Are there other people I can speak to about their experience with ESOPs?
The Australian Employee Ownership Association (AEOA) may be able to assist by putting you in contact with companies who have implemented employee share ownership plans. You can contact the AEOA by email to info@aeoa.org.au.
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Where do I go for advice on setting up an employee share ownership plan (ESOP)?
There are a number of things that you need to consider when developing an ESOP. The Planning and developing an ESOP - a guide for employers goes through the steps required to develop and implement a successful scheme.
If you need the assistance of an ESOP consultant, a list of specialists who can assist with the design and implementation of employee share plans is available on the Australian Employee Ownership Association's website. You can also contact the AEOA by email to info@aeoa.org.au.
What types of employee share ownership plans (ESOPs) are available?
There are four broad categories of employee share schemes operating in Australia:
Fully paid plans
Fully paid shares are either bought on market or issued and paid for by loans from the company to the individual employee participant or funded out of a share of profits or salary sacrifice arrangements. Deferred Plans, Exempt Plans, Loan Plans, Salary Sacrifice Plans are all in this category. Only fully paid shares in listed public companies may be quoted on the stock exchange.
Partly paid plans
Participants in partly paid plans are issued shares at a market or predetermined price (e.g. $2) but are only required to pay up a small portion of their value (usually 1 cent). The participants remain liable for any unpaid amount (i.e. $1.99) on the shares, even if the market price of the shares falls below the value at the date of issue. Partly paid plans are not commonly used in Australia.
Option plans
An option is a contractual right to acquire a share in the future at a set cost. Fully paid shares are issued on 'exercise' of the right, the payment of any specified exercise price and the fulfilment of any other specified conditions.
Replicator plans
A replicator plan gets its name because the plan tries to 'replicate' a real employee share plan, but does so without issuing real shares or options. A replicator plan usually offers participants, for no or nominal cost, an entitlement to receive a cash payment in the future subject to satisfying predetermined performance and/or vesting conditions. A replicator plan may be supported by a set of plan rules, an offer letter, a plan booklet and even a 'Certificate of Entitlement'. Replicator plans are often used where the company does not want to use 'real' shares, for reasons including retaining control, avoiding minority interest problems or lack of a market. Replicator plans are also known as 'phantom' plans, 'synthetic' plans or 'shadow' plans. There are many complex taxation, Corporations Act and accounting issues to consider for these types of plans.
For more information about choosing the type of plan would suit your organisation, have a look at the Planning and developing an ESOP - a guide for employers.
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Do I have to have a large company in order to implement an employee share ownership plan (ESOP)?
No, businesses of all sizes and types can use ESOPs to improve their business outcomes. There are ESOPs available to suit businesses that are both publicly and privately owned.
In addition to ESOPs there are other forms of financial participation that can help motivate staff and improve productivity levels. For further information on other forms of financial participation, go to the FAQ Are there other forms of financial participation that I can use to motivate my staff?
Does my business need to be listed on the stock exchange in order for me to implement an employee share ownership plan (ESOP)?
No, businesses of all sizes and types can use ESOPs to improve their business outcomes. There are ESOPs available to suit businesses that are both publicly listed on the stock exchange, and privately owned.
In addition to ESOPs, there are other forms of financial participation that can help motivate staff and improve productivity levels. For further information on other forms of financial participation, go to FAQ Are there other forms of financial participation that I can use to motivate my staff?
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What costs do I need to consider while planning an employee share ownership plan (ESOP) for my company?
If you are considering implementing an ESOP within your business there are some things that should consider. Some questions you should consider include:
What are we trying to achieve?
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What are we aiming to achieve in implementing an ESOP? Is an ESOP the best way of doing it?
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How can we tailor the plan to ensure we get the results we are looking for?
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Timeframes – is this a long term or short term strategy?
Have we thought about the practical considerations?
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Development and implementation costs – have we considered legal costs, consultancy fees to assist in developing the plan, costs involved in effectively communicating the plan?
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What about the prospectus requirements and other Corporations Act issues?
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What about the accounting issues? Is there a profit & loss impact, if we issue new shares?
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Administration costs – how are we going to administer the plan?
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Has the cost of share/option benefit been considered including possible dilution of shareholder value been considered?
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What are the taxation and FBT implications for my company and employees?
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Have we explored the possibility of tax concessions and relief from prospectus requirements?
For information on developing the right employee share ownership plan for your business, go to the online guides:
Important notice
On 1 September 2007, the Australian Government introduced a number of changes to corporate and financial services law. These have changed employers’ disclosure, licensing and other responsibilities under the Corporations Act. This website has not been updated to include these changes. For further information, please contact a suitably qualified tax or legal professional.
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Are there any Government concessions or assistance grants available for employers implementing an employee share ownership plan (ESOP)?
Generally, no assistance grants are available for implementing an ESOP. The principal Government concessions are:
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Relief from prospectus provisions (usually limited to stock exchange listed companies) under the Corporations Act, subject to the ESS satisfying the terms of that relief. (Policy Statement 49 and ASIC Class Order CO 03/184, in particular).
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Taxation concessions embodied in Division 13A of the Income Tax Assessment Act 1936 (ITAA).
Prospectus requirements
A company prospectus is commonly required when making an offer of shares to employees. Prospectus requirements relating to share ownership are principally set out in Part 6D of the Corporations Act 2001. Exemptions from the prospectus requirements are available under the Corporations Act in Section 708.
Exemptions apply, among others, to:
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small scale offerings (20 issues or sales in 12 months not exceeding a $2 million ceiling)
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if the minimum amount payable for the securities on acceptance of the offer by the buyer is at least $500 000
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if the offer is made to executive officers of the company.
Relief is also available (as mentioned above) in certain limited circumstances.
For details about the Australian Securities and Investment Commission (ASIC) and the Corporations Act, visit the ASIC website, or phone ASIC on 1300 300 630.
Additional information about how the Corporations Law effects your business can be found in ESOP corporate regulatory requirements - a guide for employers.
Tax concessions
Two key tax concessions are contained in Division 13A (ITAA) that encourage employee participation in an ESOP. First, subject to a number of conditions employers can offer eligible employees up to $1,000 in share benefits, which are effectively tax free. Alternatively, employees can receive a share benefit, subject to certain conditions, and defer tax on that benefit for up to a maximum of 10 years. No single employee can receive both benefits in the same year, and where exempt benefits are received in any year, the employee will not be entitled to deferred benefits under any other ESOP in the same year.
Employee tax concessions are an important way of encouraging employees to participate in the ESOP.
For more details, see the Australian Tax Office (ATO) web site or phone the ATO 132866.
For more general information on developing the right employee share ownership plan for your business, go the online guides:
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Important notice
On 1 September 2007, the Australian Government introduced a number of changes to corporate and financial services law. These have changed employers’ disclosure, licensing and other responsibilities under the Corporations Act. This website has not been updated to include these changes. For further information, please contact a suitably qualified tax or legal professional.
Are there any legal requirements that an employee share ownership plan must comply with?
Yes, there are many legal and regulatory requirements to consider in implementing an ESOP.
In summary, these include:
- Corporations Act 2001, including Financial Services legislation
- for listed companies, the relevant stock exchange listing rules
- the employer company constitution
- taxation law issues, including Income Tax, Capital Gains Tax, Payroll Tax and Fringe Benefits Tax.
Further detail of the legal and regulatory issues to consider can be found in employee share ownership plan corporate regulatory requirements – a guide for employers. Information on taxation issues to consider can be found in ESOP taxation considerations - a guide for employers. The Australian Taxation Office (ATO) also provides information on ESOP taxation on the ATO website or by phoning 132866.
What do you have to do to be eligible for the available taxation concession?
To offer taxation concessional share benefits, your company’s ESOP must comply with the qualifying conditions contained in Division 13A (ITAA) and summarised in ESOP taxation considerations – a guide for employers. The Australian Taxation Office (ATO) also provides information on ESOP taxation on the ATO web site or by phoning 132866.
What do I have to do to be eligible for the available Corporations Act exemptions?
Companies can be exempted from the requirement to lodge a prospectus in respect of an offer of shares under an ESOP, if they satisfy the specific terms set down principally in PS 49.15 to PS 49.55 and CO 03/184 (applying to listed public companies) or are within other exemptions in the Corporations Act.
For further information go to the ESOP corporate regulatory requirements - a guide for employers, or contact the Australian Securities and Investment Commission (ASIC) on 1300 300 630 or by email to infoline@ASIC.gov.au.
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Important notice
On 1 September 2007, the Australian Government introduced a number of changes to corporate and financial services law. These have changed employers’ disclosure, licensing and other responsibilities under the Corporations Act. This website has not been updated to include these changes. For further information, please contact a suitably qualified tax or legal professional.
What are employee buyouts? How and when can they occur?
An employee buyout is where the ownership of a business is transferred to its employees, in part or in whole, through a buyout structure, that might include an ESOP aimed at facilitating the transfer in exchange for lower salary, greater productivity and/or continuing service. Advantages of an employee buyout may include:
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retention and continuity of staff
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preservation of skills and knowledge
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prevention of the business being on the market for an extended period of time, which may cause a decline in the value of the business, as well as fear and confusion among employees uncertain of their future. This may also lead to a reduction in morale.
Although often not considered by many employers, an employee buyout is an alternative in the sale of a business.
Employee buyouts can be implemented to increase the cash flows of successful companies and to motivate employees to outperform their competition. They can also be used when only a portion of the business is being sold (for example, a subsidiary in a particular location).
Also see FAQ Can I use ESOPs as a way of passing my business on when I retire?
Can I use employee share ownership plans (ESOPs) as a way of passing my business on when I retire?
An ESOP could possibly be used to transfer or sell the ownership of your business to your employees at any time during the life of the business. Corporations Act, taxation considerations and other regulatory and practical impediments need to be carefully considered before embarking on this strategy.
Further information should be obtained from a suitably qualified tax or legal professional.
DISCLAIMER
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