An Employee Share Ownership Plan is designed to align the interests of employees with the overall success and growth of the business and those of the owner. 

The primary mechanism of an ESOP involves employees accruing a stake in the business in the form of equity, the value of which is tied to the company’s financial performance.

The employee-ownership model creates a financial reward mechanism for business performance and encourages staff to take on an ‘ownership mindset’ in daily work.

Low cost, high reward: 
An ESOP offers tangible financial incentives with minimal outlay. Our experience and proven systems take the administrative headache out of setting up all the legal and financial matters.

Incentivise innovation:
The ESOP model encourages an “Ownership Mindset” culture. Employees who are invested in the business begin to think and act like business owners.

Sustainable growth: 
Create a win-win-win situation. Employees benefit by owning a direct stake in the business, while the employer benefits from improved employee performance and employee retention by rewarding key people.

Employee engagement: 
Your ESOP is a transparent and easy-to-implement mechanism that provides clear rules and guidelines to help with employee incentives and business succession.

An ESOP is an ‘Employee Share Ownership Plan’ and an ESS is an ‘Employee Share Scheme’. 

Put simply, with an ESS, employees are issued shares directly.

With an ESOP, employees may receive either 'share options' (rights to purchase shares at a predetermined price), 'restricted shares' (shares with certain conditions attached), or 'performance rights' (rights to shares subject to meeting performance criteria).

Despite references to ‘shares’ or ‘stock’, neither an ESOP nor ESS requires a company to undergo an IPO (Initial Public Offering) or listing on a stock exchange. ESS is available to listed and privately owned companies. 

There are different tax and concession benefits for each type of scheme that are worth talking to your Succession Plus Partner about.

An Employee Share Ownership Plan is typically taxed on realised gains when the stock is cashed out.

As for dividends (should they be provided), the employee share plan usually acts as a ‘flow-through’ device, with the employee taxed at their marginal tax rate. In many cases, dividends would include franking credits, passed through to the employee.

Any money an employee earns under an ESOP is subject to income tax. However, the income is not paid via the PAYG system, and the employee is responsible for meeting their own tax obligations. This income can often be deferred for up to fifteen years.

Employees may be able to own shares through an ‘associate’ such as a family trust, for asset protection and tax benefits. Tax concessions can apply to ESS interests only if conditions of Division 83A of the Income Tax Assessment Act 1997 are met.

This information is general in nature and not tax advice. Consult with your financial adviser and tax professional about your situation, and visit our tax blog for further information.

Not every business will be suitable for an ESOP. For example, small startups and companies with inefficient accounting systems may have difficulty realising the benefits of a Plan. 

It’s also worth noting that an ESOP should not be considered as a financing method for the business, especially those in need of additional capital for endurance. 

If a plan lacks proper oversight, it can crumble and leave all parties worse off. An ESOP is not ‘set and forget’ - they are typically rolled out over many years. When implemented correctly, they should be a win-win-win for all parties.

Large fluctuations in company value, succession issues, financial needs, and shareholder conflicts can jeopardise the success of a scheme and need careful planning with an adviser to avoid.