Skip To Content Skip To Navigation

Planning and developing an employee share ownership plan - a guide for employers

Employee share schemes (ESS) or employee share ownership plans (ESOPs) are generic terms used to describe a range of employee equity participation arrangements commonly used in Australia.

The purpose of employee share plans is to encourage employees to invest in the business they work in and to more closely align employee performance with company financial and business objectives. Employees who are shareholders of the businesses in which they work are often more motivated, and may benefit from additional performance incentives and wealth creation.

The overriding aim of an ESOP is to increase the value of a business for all shareholders.

The benefits to employers of establishing and maintaining an ESOP may include retention of key staff, motivation to improve business performance, encouragement of a closer affinity between the business and its employees, and a clearer alignment of interests between shareholders and employees.

How an ESOP is applied in a business will depend on the specific aims and needs of that business as expressed in their uniquely defined Remuneration Strategy, which in turn, will reflect their formal business and human resources plans.

The clearer the alignment of expectations and results the more focussed and measurable a business' overall ESOP strategy will be.

Is an ESOP appropriate for your business?

The first issue that needs to be considered in developing an ESOP is a situation and needs analysis – ‘Can my business benefit from an ESOP?' Some of the key issues you will need to consider in your analysis are set out below. Each of these will need to be assessed against your particular situation.

Reasons why a company may want to consider implementing an ESOP:

Reason

Benefit

Explanation

Competitive pressures

Maintain competitive advantage with an ESOP

Most companies in your industry offer ESOP to their employees

Trade off in Enterprise Bargaining Agreement

Benefit received is greater than cost of providing the ESOP benefit

Provision of “free” or discounted shares may be cost effective

Remuneration philosophy

Ownership interest is a key focus of your remuneration/reward strategy

Incentives linked to organisational share value growth may be a key remuneration strategy component

High staff turnover

Reduce staff turnover

Share benefits that only vest on completion of a defined period of service may provide financial incentive to stay

Low morale

Improve morale

As a complement to other HR initiatives, shares may encourage a sense of belonging

As part of change management

As an incentive to encourage / accept change

As a complementary component to other change management initiatives

Taxation concessions

Tax concessions may increase net after tax value of a benefit compared to cash or other non-concessional benefits

Taxation concessions provided under Division 13A of the Tax Assessment Act 1936  (ITAA) may apply

Performance Incentive

Improved individual, team and/or organisational performance

May encourage improved & sustainable organisational performance, especially if quantity  of shares allocated  is linked to individual or group performance

Retention

Retain employees  - If employee leaves they may forfeit the shares

Offerings subject to vesting conditions, may encourage key personnel to stay longer to receive the benefit

TOP

Costs to consider in implementing an ESOP

There are a number of costs associated with the introduction and ongoing maintenance of an ESOP. The table below provides a brief summary of some of the costs that may be incurred. These will generally vary according to the complexity of the plan, the frequency of offers, and the number of participants.

Cost

Explanation

Remuneration strategy & ESOP design advice

Whether undertaken internally, or with the assistance of independent consultants, a situation and needs analysis should be completed to ensure the plan implemented is the most appropriate for your business' needs.

Plan documentation (plan rules and/or trust deeds)

Once the plan or plans best suited to your needs have been determined they must be formally documented, usually with the assistance of a suitably qualified lawyer

Approval and compliance

The plans must meet the approval and compliance requirements referable to the Corporations Act and Stock Exchange Listing Rules (if applicable). Approval may also be required from shareholders before a plan can be implemented.

Offer documentation

Offer documentation may include some or all of the following:

  • plan information booklet and Q&A
  • offer letter and acceptance form
  • taxation summary and section s139E election form

Communication and implementation

Comprehensive and clear communication (booklets, intranet, staff presentations). Communication materials should be designed with the participants in mind.  It is important that employees are able to understand the offer that is being made to them, and that they know where to find out more information if they require it.

On-going plan management & administration

Managing the regulatory and statutory responsibilities, processing the information flows, taxation information and database management requires dedicated internal and/or external resources. 

Printing, stationery, postage & other sundry expenses

Offers, sales, transfers, changed details, dividends, notices of meeting, annual reports and other relevant shareholder information needs to be distributed in paper or electronic form

TOP

Getting professional advice – who to involve

The design, documentation, communication, implementation and on-going management of a business' ESOP strategy may
involve a number of complex tasks beyond the scope of internal resources.
The following table contains a summary of the key tasks and the professional advice that may be needed.

Key Task

Professional Advisor

Advice requirement

Remuneration strategy & ESOP design

Remuneration, HR or specialist ESOP consultants

Legal/tax advisors

ESOP design is critical to the success of any plan. The key design questions that need to be answered include:

  • who should participate in the plan
  • how many shares/options should each participant receive
  • what performance or vesting restrictions should be imposed, if any
  • how often will offers be made
  • how should the plan be designed to achieve anticipated taxation implications or avoid unintended taxation consequences for the employer or employees

Plan documentation – rules and/or trust deed

Legal and/or specialist ESOP consultants

Any offer of shares or rights to shares to an employee will create compliance responsibilities under the Corporations Act and Stock Exchange Listing Rules (if applicable) and taxation laws. All plans need to be documented and offered in conformity with these complex regulations

Plan documentation – offer documents

Legal and/or specialist ESOP consultants

Any offer of shares or rights to shares to an employee will create compliance responsibilities under the Corporations Act and Stock Exchange Listing Rules (if applicable) and taxation laws. All plans need to be documented and offered in conformity with these complex regulations

Plan implementation and communication

Communication and/or specialist ESOP consultants

Clear, concise communication of all ESOP offers to employees is critical to the initial and on-going success of any plan/s. Communication material may include letters of offer and plan booklets (as a minimum). Also recommended are Q&A's, taxation summaries, staff presentations and intranet content

Plan management & administration

Share registry providers and/or specialist ESOP plan managers

Employee shareholders have all the requirements of ordinary shareholders plus information in relation to the taxation consequences of their participation, tracking of performance and/or vesting conditions and reinforcement of their benefits/rights of participation

Accounting & valuation

Qualified valuers, accountants and/or specialist ESOP consultants

Under the terms of the proposed changes to the accounting standards set out in ED 108 (Australian Accounting Standards Board) all share-based payments to employees will be expensed in a business' financial statements. Accordingly, all ESOP offers must be assessed (valued) at the time of offer to determine the profit and loss impact of the offer. To ensure compliance with corporate governance principles this valuation should be undertaken by persons other than the business' auditor or accountant

Time and money spent upfront in determining your ESOP objectives, structuring and documenting your ESOP, how it will be communicated, and how it will be administered, will pay off once the plan is actually in place. The chances of the plan being well received by the participants are increased if

  • the participants have been taken into account at the planning and design stage. This can include consultation with employees to discuss their views on the design of the ESOP
  • the offer material is able to be easily understood by employees and there is a comprehensive communication strategy (see Making the Most of your Employee Share Ownership Plan – Employer Guide to Communication Strategies)
  • the ongoing administrative requirements and procedures have been well thought through prior to implementation

TOP

ESOP alternatives in Australia

There are four broad categories of employee
ownership plans 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, and Salary Sacrifice Plans are all in this category.

Partly paid plans
Participants in partly paid plans are issued shares at a market or predetermined price (eg: $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 set 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

TOP

Special considerations for unlisted public and private companies

The Corporations Act, taxation laws and Accounting Standards apply to all companies considering an ESOP, whether listed or unlisted, public or private. In many cases these regulations are more onerous and therefore more costly to comply with for unlisted companies than they are for listed companies. Some of the reasons for this include:

  • unlisted companies have no ready ‘market’ for their shares
  • stock exchanges set out the rules dealing with many rights and entitlements of shareholders, eg what happens in the event of a change in control. Unlisted companies are not governed by these rules, but need to deal with many of the same issues
  • listed public companies are required to disclose financial and other information on a continuous basis, which means investors, including employee shareholders, are better informed. The Corporations Act provides certain relief from specific information disclosures for listed public companies that may not be available for unlisted companies

In summary, the key areas of special consideration for unlisted companies include:

Valuation issues
For listed companies the stock exchange provides a ready ability to determine the market price of a share. Unlisted companies do not have access to a market, and therefore, must rely on values determined by an approved valuation method. This can impose additional costs and complexity.

Liquidity
Most shares in listed companies can be freely traded on the stock market. There is usually no ready market for shares in unlisted companies.
Therefore, in order to provide liquidity for ESOP participants an appropriate mechanism for buying and selling shares needs to be created. Again, this can impose additional costs and complexity.

Minority issues
The proprietors of many private companies need to have full control of their company to satisfy borrowing covenants, estate planning, tax and stamp duty reasons. It may be necessary for private companies to regulate an employee's rights under the plan to ensure full control in the event of dilution arising from an ESOP, eg through a ‘Shareholder Agreement’.

Change of control (for instance through takeover, initial public offering (IPO) or trade sale)
Change in control provisions for listed companies are regulated under the Stock Exchange Listing Rules and the Corporations Act. Plan rules to deal with all the possible change in control circumstances need to be precisely and carefully drafted for unlisted company ESOPs.

Prospectus and other relief provisions
In certain circumstances the Australian Securities and Investments Commission (ASIC) provides specific relief for listed public companies in respect of Corporations Act prospectus requirements and certain licensing (giving financial product advice and dealing in & holding of financial products) and hawking requirements. While some class relief is available for unlisted companies any substantive disclosure and licensing relief for unlisted companies is usually dealt with on a case by case basis. This involves matters like the lack of readily available financial and other market information on a particular company.

Privacy of information
An effective ESOP often relies on a full and complete disclosure of a company's financial performance to reinforce the aims/benefits of the ESOP to plan participants. Unlisted companies, including private companies, need to be mindful of the serious implications of restricting or censoring key financial information in the interests of preserving privacy.

A trustee of an ESOP trust may require an Australian Financial Services License, although ASIC provides some Class Order licensing relief in some circumstances.

Use of trusts
A trust is often used to hold shares on behalf of employee participants in ESOPs. Trusts are used for a variety of reasons, including:

  • to administer the various performance and or vesting conditions that can apply to an ESOP. This is particularly important for share offers that are subject to forfeiture (eg. deferred share benefits)
  • to enable the orderly and cost effective acquisition and disposal of small share holdings. This is particularly important for small thinly traded stocks and/or for foreign resident employee participants
  • to ensure a company can adequately maintain and provide sufficient and correct information to employees ensuring they are aware of and are able to comply with their taxation obligations simply and easily
  • to enable a company to control and manage its share registry costs

ESOP

The key stages involved in the implementation and ongoing life of an ESOP are:

Initial ESOP set-up

  • do I need an ESOP?
  • what kind of ESOP do I need?
  • design considerations
    • who can participate?
    • how many shares?
  • draft documentation 
    • plan rules 
    • booklets
    • presentation materials
  • obtain approval from shareholders
  • implementation/communication
  • administration & ongoing communication

 

Ongoing offers

  • determine terms of offer
  • review compliance requirements
  • revise communications material
  • review administration
  • manage offer response
  • notification of allocations

 

TOP

Where can I go for further information?

Further information about ESOPs can be found at:
w:  www.workplace.gov.au/eso
p: 1800 181 088 – ESO enquiry line
e:  employeeshareownership@deewr.gov.au
a:  GPO Box 9879, Canberra ACT 2601

TOP

Important notice

This publication is produced for general information only. It does not represent professional advice given by the Commonwealth or any person acting for the Commonwealth for any particular purpose. Users should make their own further enquiries, (including as to the accuracy, currency, reliability or completeness of any information contained in this publication) and obtain professional advice where appropriate, before making any decision to take action or not take action on any matter which it covers.

To the maximum extent permitted by law, the Commonwealth and all persons acting for the Commonwealth in preparing this publication, disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.

TOP