Employee Share Plans

Monday, October 31st, 2011

Employee Share Plans

Many companies, both large and small, now have employee share plans. In theory, it is a win-win for company and employee. The company is able to reward and motivate staff without having to pay cash and the employee is given an opportunity to acquire shares on favourable terms.

There are a number of different schemes including:

  • Options – a right to purchase shares in future at a fixed price
  • Employee share loans – the employer provides a loan with or without interest to buy shares
  • Partly paid shares – the employee acquires the shares at market value but pays only a small part of the price initially with the rest being called up by the company at a later date.

There are several factors that influence whether a share plan is a good thing to participate in. You may be liable to pay tax on the benefit you receive from the share plan, and any liability arises on the date that you acquire the shares. You may have to find cash to pay this tax. It is important to also consider the effect on your cash flow. Would it be better to receive cash instead? If you want to use your shares to pay off your mortgage or as a deposit on a house, you run the risk of the shares dropping in value at a time when you need to sell them. Another consideration is the extent of your exposure to shares in one company. By investing all your savings in the share plan you run the risk of being badly affected if the company fails or does not produce an adequate return. Employee share plans are a great idea, but you need good advice so you understand the risks and obligations as well as the potential returns.

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