Employee Share Schemes – A Great Deal or Smoke and Mirrors?
You’ve been working at your organisation for years, climbing the ranks and consistently hitting your targets. Your hard work hasn’t gone unnoticed, and during your next performance review, your senior manager offers you shares in the business—either at a discount or for free—as a reward for your efforts. At first glance, this seems like an attractive, financially savvy opportunity. But is it really as beneficial as it appears?
Employee Share Schemes (ESS) and Restricted Stock Units (RSUs) allow employees to acquire shares, often at a heavily discounted rate, typically based on performance and in place of cash bonuses or salary increases. Once specific targets are met, employees gain ownership in the business, aligning their interests with the company's success and share price growth. These targets may include sales or productivity goals, project milestones, or other key performance indicators. In addition to potential capital growth, share ownership may entitle you to dividends, making it an appealing prospect.
In many cases, ESS and RSUs make good financial sense. If the company is publicly listed, its shares can be easily bought and sold on the open market. Even better, if the company is growing and performing well, the share price may increase over time, leading to significant financial gains. Some businesses also offer regular dividend payments, providing an additional income stream. Furthermore, if you continue to meet your targets, you may be eligible for more shares in the future.
However, not all share schemes are created equal. If your company is not publicly listed, the shares may not be easily traded, making it difficult to realise their value. In the case of startup companies, there is a higher level of risk, as dividends may not be paid in the near future, and the business could potentially fail. In such cases, the investment may not be as sound as it initially seems.
ESS and RSUs are typically held in escrow until your targets are met, at which point they vest and officially transfer to your name. The value of the shares at vesting is considered taxable income and taxed at your personal marginal rate. In some instances, employees may need to sell a portion of their shares immediately to cover the tax liability. This is manageable if the shares are easily tradable, but it becomes a challenge if they are not. Additionally, some RSUs come with restrictions, such as a minimum shareholding requirement for senior employees, which may limit your ability to sell shares for cash flow purposes.
If you hold onto your shares and sell them later at a profit, you will be liable for capital gains tax (CGT). Standard CGT rules apply, meaning if you hold the shares for more than 12 months, you may be eligible for a 50% CGT discount. However, there is always a risk that the share price could decline, leaving you with a loss instead of a reward. If the shares were given in place of a cash bonus, selling them at a loss could mean missing out on guaranteed earnings. It is also crucial to assess whether holding these shares aligns with your broader financial goals. Concentrating too much of your wealth in a single company’s stock can be risky compared to a diversified investment portfolio.
Being offered employee shares can be a fantastic incentive and a way to build wealth. However, it is essential to seek advice from your accountant and financial advisor to ensure this opportunity aligns with your long-term financial goals. Additionally, strategic planning can help optimise the tax implications of receiving and eventually selling these shares. Ultimately, the goal is to be rewarded with financial success—not trapped by golden handcuffs!