How Does An Employee Share Scheme Work?

While some employers entice talent with promises of store discounts, salary packaging, lifestyle parks and other benefits, one particular incentive tends to attract more interest than its counterparts. With roots dating back to the mid-19th century, an employee share scheme (ESS) offers staff the opportunity to purchase discounted stocks in the company as part of their remuneration.

The benefits of employee share schemes

So why do Australian based public companies and global entities alike place so much value on employee share schemes? For employers, the concept goes hand in hand with three key benefits, as outlined below.

Intertwining the employer and employee

For businesses, employee share schemes are a clever way to align the interests of the employee with the interests of the company. It’s an economic manifestation of the sarcastic “do you have shares in the electricity company?” question that so many parents love to ask children that relentlessly leave lights on. From a performance perspective, employee share schemes can be used as a powerful motivator that allows employees to bask in the success of a business.

Slashing salaries, yet keeping staff sweet

For start-ups, employee incentive schemes can be a clever way to reduce expenditure on staff salaries, without compromising on satisfaction. By dishing out shares as part of remuneration packages, start-up SMEs can attract top quality employees, despite the fact that they’re at their most cash-poor stage.

And as mentioned above, they’re not just for large companies. By offering employees a share in the future of a business, SME entrepreneurs can lure in the top talent that will play a key role in long-term success.

Attracting talent

For businesses wanting to attract superlative talent, employee share schemes are invaluable. Not only do they unlock a host of tax advantages, but they also beef up investment portfolios, and serve as a flexible, cash-free benefit.

How to kick-start your ESS

The benefits of employee share schemes are tangible, and if you’re a public company implementing a policy, could be a great option. So how can you pull it off? Here’s some key factors to consider when kick-starting your ESS.

Planning is key

To be effective, it’s important to ensure your ESS is consistent with your broader business strategy. Schemes can be adjusted to align with your business’s goals, so keep this in mind when developing a system.

For example, the ESS of a business that’s focussing on retaining key staff could be markedly different from a firm that’s actively recruiting new talent. Similarly, a company that’s attempting to introduce a performance related pay culture may structure its ESS differently.

The key is to realise that every business is unique, and as such will require a bespoke ESS policy. A great starting point is to ask yourself what your business is trying to achieve out of an ESS, and work backwards from there.

Play by the rules

There’s no grey area surrounding employee share schemes, however playing by the rules can sometimes be a little complex. In all cases, your company should be aware of its responsibilities as an employer, as well as its legal and compliance obligations. You’ll also need to issue employees with an ESS Statement, as well as submit an ESS Annual Report to the Australian Tax Office (ATO).

Tax consequences should take top priority, for both the employer, and the employee. Remember, as of July 1, Australian tax rules regarding ESS interests granted to employees have changed! This has made it easier to issue share options to Australian employees, and brings the nation into line with other developed economies, and best practices employed by multinational companies. Make sure you’re up to date, and playing by the rules.

Cash in on start-up opportunities

Under the new tax rules, start-ups win big! Businesses that qualify as “eligible” start-up companies are first in line for concessions that open up new opportunities for both employers, and employees.
Maintain a clear conversation with employees

As aforementioned, employee share schemes can be complicated, especially to the average employee. This means it’s crucial to maintain clear communication with all participating staff members.

Make sure they understand exactly what they’re signing up for, and how they stand to benefit from their shares. You should also cover what happens if goals are partially met or not met at all, as well as the consequences of leaving the company.

Along the way, companies should also offer employees regular updates regarding progress. Ultimately, the more an employee understands a scheme, the more value they place on their involvement. This relates directly back to the idea that participation in ESS schemes drives employee performance.

So is an ESS for you? If you’re a small business, a start-up or an established SME, don’t be put off by the misconception that employee share schemes are reserved for big businesses with Wall Street credentials. With the right approach implementing an ESS can be an invaluable strategy, that can be used to both attract, and retain the crème de la crème of the national, and international talent pool.

For more tips and advice on managing your workforce, be sure to check out more of our invaluable resources on the Ento blog today.

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