We talk to the NZ Herald about Employee Share Scheme options

Businesses wanting more buy-in and less churn from their staff, and who want to hire people they might not otherwise be able to afford, could offer them a direct stake in the business.

Sharing the risks and rewards of a business is well established – with cooperatives at one end and company bonus schemes at the other. But in the middle are plans where companies offer its staff shares at a discounted rate or have them put some “skin in the game” from day one – perhaps paying a lower salary in return for a percentage of the business. Which is fine if the company does well.

Facebook is a prime example. Some of its staff made a six-figure fortune overnight when the company went from being privately held to a public one. When it listed on the Nasdaq in 2012, almost a third of Facebook’s staff had a financial interest in the company’s success. In this scenario, staff buy shares at below market rates and sell them at a later date, providing a profit that may be taxable under certain circumstances.

“The ongoing maintenance of employee share schemes [is] not overly difficult or costly to administer if set up properly,” says Graham. “And [it] can mean that a firm offers staff shares, but only transfers them to employees when they achieve certain performance indicators.

“The dark side to many employee share scheme options is where staff borrow money from their employer to buy shares, and then because the value of the shares has dropped, end up owing more in loan repayments than the shares are worth.

“This can happen for a number of reasons including an economic downturn and can be a very demotivating situation for employees to find themselves in – even if the loan is interest free.”

While some firms offer shares and bonuses for good performance, some listed businesses put share purchase plans in place – allowing staff to buy its shares with money deducted directly from their pay.

A report by Computershare, an investment services company that manages company share purchase plans, shows that of 667 people in Australia and New Zealand who responded to its survey, 74% joined their firm’s share plan because they considered it a good investment.

Share plans run by Computershare involve staff spending a set amount each pay day on company shares. Due to the fluctuating price of shares it is impossible to say how many shares can be purchased each time. However, firms who take part in this scheme offer free shares to a maximum value of $3,000 a year.

The average contributions made by members of the Computershare schemes in Australia and New Zealand were not particularly high though, with the median member investing 3 per cent of their gross salary on shares.

According to the survey, owning shares was either the employee’s largest investment or their only investment. (Perhaps the New Zealand respondents forgot about their KiwiSaver contributions).

Matt Reed, business development manager at Computershare, says people who sign up to buy shares under its scheme tend to be more loyal to their employer. “They share the company’s values and view the company as a good place to work,” he says. “Those who do participate in a share plan are far more likely to keep an eye on company performance and its share price than those who are not in a scheme.”

It’s worth pointing out that anyone aged over 18 can buy shares in any listed firm via a wide range of sharebroking firms and banks – so there’s nothing to prevent you from buying shares in your firm if it is listed on a stock exchange. It is a risky venture though.

The benefit of a share plan is that employees who can take part in such a scheme can buy shares with relatively small amounts of money – often below the minimum purchase amount stipulated by the local stock exchange (which is roughly $500).

There are two ways to make money with shares. The first is that if the shares rise in value they can be sold at a profit – if this is the plan, then you need to keep a close eye on the market to pick the best time to sell (or buy) shares. Of course, the value of shares can go down too.

Secondly, as a shareholder, if the company shares its profits by way of a dividend then you may enjoy a residual income all the time you own shares. But not all firms make enough money to reward their shareholders (so look at the firm’s track record for paying dividends).

Graham says a simpler way for businesses to get staff on board and to stick with the company is to pay them a bonus based on the company’s externally audited growth.

“We call it a phantom share scheme,” he says. “If all goes well, staff get a cash payment rather than shares based on their and the company’s performance.

“This way, there are no employee share agreements, and because it is a cash payment the tax (under the PAYE system) and accounting consequences are straightforward it keeps things really simple, which is what a lot of businesses want.

“Tax is probably the biggest issue out of all of this as the structure of the share scheme has a direct impact on the tax payable by the employee,” says Graham. “In the regime we are under, if you don’t get things right there are penalties IRD can impose.”

But then one needs to consider the downside. For an extreme example, the value of shares in online accounting firm Xero have dropped 47 % this year on the NZX.