Employee share schemes (ESS) give employees shares in the company they work for, or the opportunity to buy shares in the company. Employees generally pay for the shares through a loan from their employer, through salary sacrifice, an upfront payment, from employee bonuses, or by using the dividends received on the shares. An employee share plan trust is the most common entity used to establish an ESS.
The benefits of establishing an ESS include:
- Attract, retain and motivate staff as they align employees' interests with shareholders' interests.
- Employees can benefit financially if the company performs well.
- Existing owners can sell out to employees as motivated buyers.
- Employee share schemes can be very tax effective for both employers and employees. For example, if an employee share scheme were structured, so each full-time employee received $1,000 of free shares each year, it would have the following tax benefits:
- The employer gets a tax deduction for the market value of the shares issued to employees (i.e. $1,000 deduction for each employee).
- The employee receives the first $1,000 of employee shares per annum tax-free.
- When the employee sells the free shares, only the capital proceeds that exceed $1,000 are taxed.