Are Employee Share Schemes resonating with your employees?

by 11 Jun 2013

What can companies can do to get the most out of their plans’ budgets, whatever their size? Matthew Garvan outlines where employers currently sit and what the future may hold.

In April this year, Employee Ownership Australia & New Zealand (EOA) released a report looking into employee share schemes (ESS) since key legislation was changed on 1 July 2009. The EOA expert panel that produced the report comprised lawyers, accountants and share plan administrators, which meant a holistic view of this area of employee remuneration.

You can view the report here.

The key findings of the report included:

 

  • The legislation change has increased companies’ compliance costs and added an additional level of complexity to plan administration
  • Broad-based employee share plans have been impacted the greatest by the changes
  • Employee Share Option Plans have also been significantly impacted by the changes
  • The legislation change has led to a decline in international plans offered by Australian companies
  • A key concern of the former legislation – tax at termination of employment – has not been addressed
  • There is still uncertainty about some aspects of the legislation

 

There’s now a responsibility on stakeholders within the industry to lobby government for change. The recommendations that we believe can be implemented quite quickly and easily are:

 

  • Remove or increase the $5,000 salary sacrifice limit
  • Reinstate ‘tax at exercise’ for options
  • Increase the $1,000 tax exemption limit

 

The next step for EOA is to lobby government stakeholders and work with them to understand how effective change can be implemented. In the meantime, we need to continue working within the current framework to ensure companies get the most out of their plans.

Legislation not being as supportive of broad-based employee share plans as it could be places additional importance on plan structure and operation, to ensure both companies and plan participants are getting value for money.

While plan participation rates in general have fallen since 1 July 2009, some companies have gone against this trend with steady or even improving rates. They’ve achieved this by making the benefits of plan participation clearer to their employees, however, the way they’ve achieved this varies from company to company.

The first step is to review your existing plans to ensure their type and structure are the most effective for helping to achieve your company’s objectives. Amongst Computershare clients, we’ve seen many clients commence allowing employee participation in both tax-exempt and tax-deferred plan structures, on an all-employee scale. As this was not previously allowed under pre July 2009 taxation legislation, adjusting employer offer structures allows employees to potentially maximise the taxation benefits that are available to them via employee plan participation.

Research[1] shows that the majority of plan participants do not own shares in any other company, which is important to remember when building a strategy for your plan. The easier it is for an employee to understand your plan and the wider concept of share ownership, the more likely they are to understand how they can benefit from being a plan participant and a part owner of their employer, supporting alignment of employee objectives to those of the company.

Increasing company matching rates for employee contributions has also been an effective method that many of our clients have used for growing plan participation rates. Obviously, this method relies on an increased plan budget which, particularly in the current climate, isn’t always feasible. What all companies can do to get the most out of their plans’ budgets, whatever their size, is improve their communications with employees.

Work with your legal team and your administrator’s communications specialists when developing communications to ensure that only key messages are included. Once you’ve determined your key messages, strip back the jargon to ensure that even someone who has never owned shares before can understand it. This seemingly straightforward step is the most important in effectively communicating your plan information to employees, even more so than the channel of communication.

About the author

Matthew Garvan is Managing Director, Computershare Plan Managers

[1] Brown, M., Minson, R., O’Connell, A. and Ramsay, I., Why do employees participate in employee ownership plans?, The University of Melbourne

 

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