Share Plan Design

Employee financial participation is a critical element in the human resources strategy of a modern business. One way of achieving employee financial participation is through a well-designed employee share plan.

This sort of participation provides employees with both a stake in the business as an owner and, through that stake, the same perception of the business that other shareholders have.

The term ‘employee share plan’ covers a range of different plans, including option plans, and different sorts of plans can be designed to achieve different results. The choice of plan should be determined by the objectives that the individual business wants the plan to achieve.

Plans range from simple plans, with benefits that are easy to explain to all the employees in the business, to relatively complex plans. These complex plans are often restricted to key executives.

Well designed employee share plans that secure income tax concessions for employers and employees fall into two categories. (These are sometimes called ‘qualifying plans’.)

Exempt Plans

With these sorts of plans, businesses may grant employees up to $1,000 of free shares each year without the employee incurring tax on these shares. “Buy one-get one free” is an example of a plan that makes use of this sort of concession.

Deferred Plans

Under “deferred plans” shares may be issued at a discount to the market price, and the taxation of the discount may be deferred for up to ten years.

There are also other plans that may be tailored to meet the specific requirements of a particular business. These are called non-qualifying plans.

Loan Plans  

Loan Plans can provide shares or other securities to employees, funded by the provision of an interest-free loan. Modern versions protect employees’ downside exposure, which maximises employee participation rates.

Replicator Plans

A much underrated and under-utilised plan, the Replicator Plan enables any organisation to offer equity to their employees. Properly designed, communicated and implemented, the Replicator Plan has unlimited design flexibility and effectiveness.

The RSG Framework of Employee Share Plans can be viewed by clicking here.

What plan is most suitable?

If you are planning to introduce an employee share plan, there are a number of questions that you must answer before you decide what sort of plan suits you best.

Some of these questions are as follows.

1. What does the business want to achieve with its plan?

2. Who will take part in the plan?

3. Does the company want to use real shares or options in its plan or would it prefer to use a replicator plan? For example a company might opt to use a replicator plan if its shares were tightly held.

4. If the company wants to use real shares or options does it want to buy these on-market, or to issue new stock?

5. Over what period does the company want the plan to operate?

6. Does the company want to carry out its administration in-house or to have it undertaken by a specialist firm?

7. How will the company tell its employees about the plan?

8. Will the costs of the plan be tax deductible to the company?

9. How will the shares or options granted to employees be taxed at their hands?

10. If the company wants to use options, how long will it be before they can be exercised?

11. What will happen if a company uses an option plan, and the share price falls so low that it is uneconomic for employees to exercise their options?

12. If the purpose of the plan is to build up employees’ capital, would they be better off under a savings plan?

The RSG team has been designing and implementing share plans in Australia and New Zealand since the 1980s and they have the answers to these questions and the other questions that you should consider in developing a plan.