Employee share schemes- what you need to know

A lot of our clients get work shares as part of their package. As part of reviewing your financial plan, we will usually make recommendations regarding these as each package is different.

In this blog post, I’ll break down the 6 main things we consider when reviewing an employee share scheme.

Question 1: How much are you paying for the shares?

Not all share plans are the same. In some instances, the shares are given to you for free as part of your employment arrangement. In some instances, you buy them but at a discount.

The first thing we always want to know is, how much are these costing us?

I’ve seen some pretty shocking share plans where the discount is nil or basically minimal. In this instance, your employer is just selling their shares to you and not really doing you a favour at all.

Understanding what you’re being given and how much you’re paying is incredibly important when considering a share plan.

Question 2: Are the shares able to be sold?

In assessing your employee share plan, we need to understand if your company is a public company or a private company.

A public company is listed on a stock exchange which means when you want to sell your shares, you can easily do so.

A private company is owned by its shareholders and you usually can’t just sell your shares when you want to without finding a buyer and going through a process approved by the company.

If you’re buying shares in a private company, this is more akin to buying a private business and you need to be somewhat cautious.

Question 3: How stable is the company?

A good question to ask yourself before purchasing shares is, “is this a well performing company?”

Most people I talk to believe their company is a good company but it’s at least worth googling “(company) share price” to understand the share price history.

In a lot of instances, you’re going to want to offload your shares as soon as you can anyway so the question may be “how stable is this company?”.

Say for example, your employer offers you a 1-1 share match where you buy shares and they match them. This could be a great deal but if the share price has historically dropped 50% or greater, there is still a chance you’ll lose money on the shares.

Question 4: Will this lock you into the company?

It’s important to remember that your employer is not giving you shares out of the kindness of their heart. Employee share schemes are a great way of locking staff into longer employment terms.

Usually what happens is you will buy some shares which will have a date where they are matched (usually in a couple of years). If you don’t stay with the company for those years, you’ll lose the match.

This can encourage you to stay on at the company longer which in turn can affect your ability to seek out a higher paying job.

Before committing to a plan, it’s important to understand what you’re giving up and balance whether the discount is worth it.

Question 5: When do you intend to sell the shares?

When it comes to investing, you really want to ensure you’re well diversified. This ensures that if one company goes out of business, it doesn’t drag your whole portfolio down with it.

The problem with investing in the company you work in, is not only are you putting all your money in one share (instead of diversifying it), you’re also linking this to your employment. From a diversification perspective, this is risky.

As a general rule, most of my clients look to sell their work shares once they can and move them into a more diversified portfolio.

You may choose to retain some of the shares if you think the company is going to do well but I wouldn’t suggest holding a large part of your portfolio in your work shares.

Question 6: Consider the tax you’ll have to pay

How you get taxed on your shares is incredibly complex. As a general rule though, you usually have to pay tax on them once you become eligible to sell them.

If you don’t sell any of your shares, you may still be liable for the tax and this can catch people out.

If you are participating in an employee share scheme, it’s important to understand when you’ll be taxed on the shares to ensure you aren’t caught without the money to pay it.

Like all things in finance, this gets complex quickly. If you are looking to review your financial plan then please reach out. We have client’s all over Australia and would love to hear from you.