PKF Australia

Accountants and Business Advisers

Employee Share Plans

Employee Share Plans

Posted 01 Mar 13 by Nick Falzon

Employee Share Schemes. A real ugly duckling?

At first glance, and often when they are initially established, employee share schemes do not look particularly appealing. In fact they may look downright ugly!

For business owners they can be costly, not valued by employees and difficult to administer. Not a very attractive scenario when you are diluting your own interest in the company.

For employees, shares can appear to hold little value due to a lack of liquidity and limited influence on the direction of the company as a minority shareholder. The issuing of shares can result in tax being paid by the employee when they haven't received any cash yet and employees may perceive that their basic wage is lower than it would be because of the shares issued to them.

So, why are Employee Share Schemes so valuable to private companies?

All of these issues can be managed or overcome and once they are dealt with the benefits of employee share schemes become clear. They are ideal for performance-based pay and linking employee remuneration to the wealth created for business owners. Company shares can be extremely valuable to employees and also boost company cash flow as they are a non-cash form of remuneration.

Employee loyalty and succession planning

A well developed scheme could improve employee loyalty and create a genuine solution to succession planning. An effective scheme should:

  • Consult with employees to determine what they value and what is costly and construct the plan with them in mind. Considering tax and cash flow outcomes of the scheme is paramount.
  • Articulate what employee shares are worth so they appreciate what they are receiving.

No two schemes will be identical, because no two companies are the same. However, with well-considered implementation the ugly duckling share scheme will become a beautiful swan creating wealth for major shareholders and employees of private companies.

For more information, please contact one of our Employee Share Plan specialists.


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