Basic Plan

Employees contribute after tax salary and wages to fund the acquisition of shares at market value

  • Employees save brokerage on share purchases as this cost is met by the company.
  • Employees have full exposure to share price movements.
  • As a contribution plan it must comply with Corporations Act requirements, which can be particularly onerous for unlisted companies.

Global Employees Plan (GEP)

Same as a Basic Plan but with “matching” by the company as an employee incentive – mainly used by companies with employees in multiple overseas jurisdictions

  • Used by companies that want all employees around the world to participate in the same plan.
  • Not very attractive to Australian employees, and generally not optimised for any jurisdiction; it represents the lowest common denominator in ESOP design.
  • As a contribution plan, it must comply with Corporations Act requirements in Australia.

The Share Save Plan™

A salary sacrifice plan which may have a matching aspect

  • Salary is sacrificed each pay period and applied to acquire Plan Shares which attract dividend equivalent entitlements that are also delivered in additional Plan Shares creating compound growth.
  • Probably the best salary sacrifice plan.
  • Maximises employee share ownership at the lowest cost to the Company through refundable salary sacrifice.
  • The plan is tax effective with no risk for employees and low cost for companies.

Share Rights Plan (SRP)

Based on Rights that represent entitlements to shares when they are exercised

  • Tends not to be used as a salary sacrifice plan as Rights do not attract dividends, although this can be addressed via dividend equivalents.
  • The plan is not highly geared but provides benefits for employees irrespective of the extent of share price movement unless salary sacrifice is used. There is no exercise price which results in fewer shares being issued on exercise than options and in most cases SARs.
  • Because a Rights plan is not a contribution plan, it must comply with fewer Corporations Act conditions than Option Plans.

Share Option Plan (SOP)

Uses options, usually granted with an exercise price set at the share price at the time of the grant – allows employees to participate in share price growth but not dividends

  • Highly geared with no risk for employees but can involve costs for companies.
  • Can be structured with a premium exercise price so that they will have an up-front taxable value of nil, but this puts them at high risk of producing nil benefit value.
  • Most often used by companies expecting high share price growth.
  • However, options, compared to SARs (which produce an identical benefit in most cases), are:
    1. Subject to more regulation and restrictions.
    2. More expensive.
    3. Administratively more complex.
    4. Harder for employees to fund.
    5. More dilutive.
    6. No more beneficial.
  • Because an Option plan is a contribution plan, it must comply with somewhat onerous Corporations Act requirements.

Share Appreciation Rights (SARs) Plan

Uses SARs, which are like options but with a “cashless exercise” – net benefits for employees are identical to options with the same terms

  • Probably the best plan for most companies that expect high share price growth. However, PEPOs can produce greater benefits if very high share price growth occurs.
  • If the company qualifies for the start-up concession then options may be a better alternative.
  • The plan is highly geared with no risk for employees but can involve cost for companies.  It relieves the need for employees to fund the exercise price and results in fewer shares being issued on exercise.  Also, there are fewer Corporations Act requirements to comply with than apply to Option Plans because SARs plans are not contribution plans.

Share Purchase Loan Plan (SPLP)

Based on concessional loans being provided to employees to fund the purchase of shares at market value

  • Very unlikely to be a good choice compared to alternatives that provide comparable benefits at lower cost and with lesser regulation.  Can appear attractive due to application of CGT but when additional company costs are considered it is less attractive than most other plan types.
  • Onerous disclosure conditions for unlisted companies and somewhat onerous for listed companies due to being a “contribution plan”. Can only be offered once per employee who does not hold shares in the company, in unlisted companies making it unsustainable (“one-shot plan”).

$1,000 Tax Exempt Plan (TEP)

The benefit is tax free but must comply with a series of conditions including full vesting at grant and a 3-year non-disposal period

  • Generally used to provide an additional benefit but salary sacrifice can be used if company cost is a challenge.
  • It can use shares or rights and therefore can reflect the characteristics of these types of plans. Can be done as a “bonus” or on a salary sacrifice or matching basis to limit cost-to-company.

Deferred Share Plan (DSP)

A salary sacrifice plan to acquire shares, only – tax is deferred until disposal restrictions cease to apply to the shares

  • Very unlikely to be a good alternative compared to other salary sacrifice plans.
    Limited benefit and not flexible due to need to specify disposal restriction period/taxing point up-front when shares are acquired.
  • Impossible for most companies to implement unless they also operate the $1,000 TEP (75% test needs to be met).

Start-up Concession Plan

Allows unlisted companies to offer either shares at a discount of up to 15% off market value or options with an exercise price of not less than the market value of a Share at the time the option is granted

  • Vesting conditions can be applied but are not necessary. Specified tax valuation methodology may be used to determine market value which can effectively provide deep discounts.
  • No tax is payable until sale of the shares and then the CGT provisions apply to any profit.
  • Likely to be the best plan for companies that qualify.

Phantom Equity Plan

Can replicate most other ESOP plan types except those that rely on specific taxation concessions and option plans

  • Should be considered by companies facing specific challenges such as:
    1. Compliance obligations in overseas jurisdictions making it impractical to set up a specific real equity plan,
    2. Current shareholders not wishing to extend ownership to employees,
    3. There being no liquid market for shares resulting in a need to settle in cash.