Employment Hero

How to create an Employee Share Scheme (ESS)

Sometimes attracting awesome staff into your new business can be a tough task. It’s not that conventional startup perks like ping pong tables, a casual atmosphere and Friday beers aren’t great, but they might not quite stack up against the long list of employee benefits of a large corporate.

Luckily, there’s a tried and tested method which doesn’t just capture the attention of incoming talent, but can also inspire your team to have a growth mindset throughout their employment.

What is an employee share scheme?

An employee share scheme (ESS) – also known as an employee equity plan – is a program that offers your team members shares or options for your company, so they become part-owners of the company. Even though an ESS is commonly synonymous with startups, this type of scheme is open to businesses of all sizes.

What are the benefits of an employee share scheme?

Investing is becoming the habit du jour for savvy employees around the world. Although it can be risky, there are different ways to invest that can be extremely prosperous over time. For Australians, the historic low of interest rates can make investing a more desirable option to cash savings. There’s arguably a bigger appetite for investing than ever.

I like the stock

An ESS can take that desire for an employee to invest and translate it into a company benefit. Employers may need to join your business with a lower salary package than they might be offered at a major corporation, but owning a stake in the company could see them make a considerable financial return as the value of the shares increase over time.

We are generally more likely to feel ownership over something we, well, own. So when you give your employee shares or equity options you’ll likely see further engagement, productivity and excitement surrounding performance targets and exceeding goals.

Instead of feeling disconnected from a company’s success, the staff member knows that their contribution to the growth of the company could give their shares greater market value and directly impact their return. Think of it almost as a long-term commission structure. Through this process of growth, company, employee and shareholder alignment becomes stronger.

In other words, it’s pretty much a win-win-win.

How does an employee share scheme work?

There are a huge variety of ways that employee share schemes can work. Some of the most common ways are to offer employees shares at a discounted rate or grant employees shares in place of a performance bonus or additional remuneration. Schemes generally last between 2 and 15 years. Let’s walk through some of the finer details.

Shares vs. Options

It’s worth first clarifying the difference between offering your staff shares vs. offering them options.

In simple terms:

  • Shares are a stake of a company – a company might offer their employees straight-up shares or offer shares to their employees at a discounted rate
  • Options are promises to buy shares after certain (vesting) conditions are met. Vesting is the entitlement for an employee to earn more share options, like allocating an employee more options for every year they are at the company
Baby throwing money

Which companies can participate?

In Australia, companies of all sizes are able to offer an ESS, whether they are publicly listed or privately owned.

There are though some advantageous incentives designed specifically for SMBs and startups should they meet the eligibility criteria. In summary to qualify you need to meet the following criteria:.

The company cannot:

  • Be an investment company
  • Have had a total turnover of over $50 million in the previous income year
  • Offer preference shares
  • Offer shares or options to a member of staff who already holds in excess of 10% of a company’s shares or controls more than 10% of a company vote

The ESS must:

  • If it’s offering options, the share price must be at least 85% of fair market value (unless eligible for the safe harbour valuation)
  • If it’s offering shares in the company, it must offer them to at least 75% of your Australian resident permanent employees who have been at the company for at least 3 years
  • Allow employees to sell their shares/options either when their employment ends or after 3 years of being granted
  • Follow annual reporting requirements of the ATO, providing a statement by 14 July each year

You will also need to get your company shares valued prior to offering an ESS. To do this you must use an approved market valuation method which will meet government standards (‘safe-harbour’ valuation).

Should your company qualify for the start up concession there should be considerable economic and tax benefits to your employees.

So, is it worth it?

Setting up an ESS can be a complex task for a small business owner, so make sure you get some professional advice for your unique situation. As there are so many financial details and legal repercussions for getting it wrong, it really pays to do this one right.

Despite the initial investment, implementing an ESS can be a great way to keep employees engaged and motivated. If your business is small and your starting resources are limited, they can attract top talent that are literally invested in your growth and success.

Disclaimer: Please note that this information is general in nature and should not be constituted as professional advice. You should seek professional advice from a registered financial advisor and registered legal practitioner if you would like to learn more.

Trying to think of ways to keep your team engaged and aligned on growth goals? Employment Hero’s HR platform is purpose-built to help employers boost employee engagement. Want to learn more? Book a demo with one of our small business specialists today.

 

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