If you’re invited to join an employee share scheme, you may be able to buy shares at a discount on the current market rate. Schemes vary, so check the offer terms and consider the pros and cons before you sign up.
How an employee share scheme works
In an employee share scheme, you get shares or can buy shares in the company you work for. This is also known as an employee share purchase plan, share options or equity scheme.
Companies use share schemes to attract, retain and motivate employees. They also align employee interests with those of shareholders.
There are different ways of paying for shares, such as:
salary sacrifice over a set period (say, 6 months)
dividends received on shares
a loan from your employer
full payment up front
You may be eligible to receive shares as a performance bonus, or as remuneration instead of a higher salary.
Larger companies typically offer ‘ordinary shares’, which give an equity invesment in the company. In a smaller company, you may get dividends only, which means you don’t get other shareholder rights, such as a vote at the annual general meeting.
What to check before you sign up
Research the company to see how well it’s doing and whether the shares are likely to increase in value. See choosing shares to buy for guidance on how to do this.
Each share scheme is different, so look at the terms and conditions of the offer. Check:
when you can buy or sell the shares
if you will receive dividend payments
what happens to your shares if you leave the company
the tax benefits (see employee share schemes on the Australian Taxation Office website)
Ask questions if there’s anything you’re unsure about.
Consider your personal circumstances and financial goals. Can you afford to buy shares at this point? Or do you have other priorities like paying off your mortgage faster or contributing extra to super?
If you decide to go ahead, think about how you can diversify to spread your investment risk. What if your shares fall in value? Or the company you work for goes out of business?
If you need professional advice, talk to us on Ph 1300 136 508.
Pros and cons of employee share schemes
You benefit financially if the company performs well.
It could motivate you to stay longer with the company.
You may be able to buy shares at a discount to current market price.
You may not have to pay a brokerage fee when you buy or sell shares.
You could get tax benefits, depending on the features of the share scheme and your financial situation.
There are likely to be limitations on when you can buy or sell shares.
If you’re paying for a share package over time, you might have to pay it off before you can sell the shares.
You may have to give back or sell your shares when you leave the company.
Your share package could come with restrictions. For example, you may have to meet performance targets, or stay with the company for a certain number of years.
You could lose money if your shares go down in value or the company goes out of business.
Costa buys shares in his company
Costa works for a large Australian company. Each year the company offers permanent employees an opportunity to buy up to $1,000 worth of shares. The shares can be bought at market rate with pre-tax income through a salary sacrifice arrangement.
Costa checks the terms and conditions of the share offer. It says he cannot sell any shares for a period of three years from the purchase date. If he leaves the company within that time, he has to sell the shares and may have to pay extra tax.
The company is performing well and Costa intends to stay there for the next few years. He thinks the shares will be a good investment. By buying with pre-tax income, he can buy more shares than he could with after-tax income. He decides to go ahead and accept the full share offer.
Of course, we are here to assist you when it comes to your personal finances and your investment strategy so give us a call today on Ph 1300 136 508.
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/shares/employee-share-schemes
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns. ImportantAny information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.