The employee share scheme (ESS) is an integral part of the financial landscape in many Australian companies. They are sometimes referred to as ESOPs (or Employee Share Option Plans), but the reality is an ESS is slightly different from n ESOP.
To keep it simple, an ESS allows employees to purchase or be awarded shares directly. Whereas an ESOP will enable employees to purchase or be granted the right, but not the obligation to purchase or take the shares.
In essence, an ESS allows staff members to purchase or receive shares in their company and can often be used as part of the remuneration package. The scheme has been used in many countries around the world, and its advantages make it an attractive option for businesses looking to provide their staff with an additional financial incentive.
The first step in launching an ESS is considering the scheme’s eligibility criteria. Generally, participating staff need to have been employed by the company for at least 12 months and be paid on a salary basis rather than an hourly basis. In addition, the employees must be on the payroll for the scheme to become active, and the age restrictions that apply vary from company to company.
Once the ESS is operational, it’s important to ensure that the scheme structure complies with the relevant legislation. Companies should take the time to understand and adhere to the legal requirements to ensure that the ESS does not have unintended tax and other consequences for the company or its employees.
Communication surrounding the ESS is key, ensuring that all employees know how the scheme works and who is eligible to participate. In addition, the tax implications will be vital to promote high employee engagement. By understanding the exact details of the scheme and ensuring that all staff understand the key components, companies can minimise the risk of paying out inappropriate amounts or falling foul of the law.
Finally, ensuring that the ESS remains fit for purpose is important. Changes in the business, its structure or any amendments to the terms of the scheme need to be communicated to all employees in a timely manner. Companies should also consider if the scheme needs to be amended or if there are ways that it can be improved. Making small changes to the scheme will help keep it attractive to employees and maximise its benefits.
The ESS is a complex and highly regulated form of remuneration, but organisations that launch a scheme correctly can provide their staff with an attractive and rewarding financial incentive. However, for the scheme to achieve its desired outcome, companies should have a thorough understanding of the underlying laws and make sure that they regularly review the relevant legislation to ensure the scheme remains compliant.
If your company is considering launching an ESS, give our Business Lawyers a call.