Employee share plans, why should you participate?

by Employee Share Ownership on June 11, 2012

Why should you participate in your Company’s ESOP?

A key question for most people faced with a decision about whether to participate in a company employee share plan is what is in it for them?

Free Shares
For some employees the decision is a fairly simple one, if you are being gifted shares (with or without performance conditions) generally it makes sense to accept the offer. Unless there are any adverse tax conditions, where you have to pay tax before you get the shares/rights or options it makes sense to accept something that is being given at no immediate direct cost to you but with large upside potential.

Salary Sacrifice plans
Where you are being asked to put some of your own money (pre or post tax) into buying shares in the company the decision is a little harder. You need to look further at the decision and like any investment whether you have sufficient disposable income to apply to the plan, what the likely returns will be and what benefits the company is offering you for participating in the employee share plan.

Why employee participate – the research
Popular employer sentiment overwhelmingly suggests that the driving factor for employee share plan participation is financial motivation. Melbourne University’s recent study corroborates this with 79% of employees seeing participation as a way to share in company profits, 74% viewing it as a means to save and 78% as a way to build a nest egg.

What you need to check:

  • What are the terms of the plans, what happens if you leave or need to take a long period of leave? What do you have to contribute? What does the company provide in return? What conditions are there for the plan?
  • What is the tax treatment generally and specifically for you, make sure you are not being taxed before you get the benefit of the shares, rights or options;
  • What are the benefits and potential risks? What will you lose if the share price falls? How fair does it have to fall before you make a loss? How is the company performing and likely to perform in the future?

Final Tips:

  • Don’t commit more than you are willing to lose, make sure you don’t have all your eggs in one basket;
  • Think of it as a long term investment, that will only deliver over time;
  • Seek some advice about what this means for you;
  • Think about what you will do with the shares once they are yours completely, should you roll over to super or move into your family trust?

See also the following pages:

(i)        What is employee ownership
(ii)       Employee share plans – why you should participate 
(iii)      Employee ownership, participation and engagement – how to make it work
(iv)      8 Lessons From Successful Employee Owned  Companies
(v)       7 reasons to consider employee ownership/ESOPs

 

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