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Employee Share Scheme (ESS) Guide

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedJuly 20212 min read

From healthcare to holidays, employment packages come with an array of benefits. In Australia, a common benefit is an employee share scheme, or ESS. Employee share schemes might come as a standard part of the salary package, or employees might have the option to purchase shares at a discount. What are share options exactly, and how do these employee share schemes work? We’ll explore these questions and more below in our ESS guide.

An employee share scheme allows employees to share equity in the company they work for. Some employers will offer shares upfront, while others will provide the chance to purchase shares. There’s plenty of flexibility in an ESS. As a business owner, you have the choice to reward key team members or all employees. It’s also possible to distribute shares to external consultants and advisors, even if they’re not full-time employees.

Share schemes offer a way to attract and retain top talent, while at the same time ensuring that employees share interests with company stakeholders.

There are many ways to set up your ESS. Employees might pay for shares using a loan from the employer or sacrifice a portion of their salary for a set period. Another option is to give shares directly as part of an annual bonus or performance-based reward. Some companies will even offer shares in place of a salary raise. Smaller companies might only share dividends rather than offering employees a decision-making stake in the company.

One of the most important distinctions to make is between shares and share options.

Real shares are given to employees, business owners, and investors. Growth shares are issued to employees at a small hurdle price, allowing the recipient to share in future business growth. The benefit of giving real shares is that employees enjoy direct ownership, receive voting rights, and benefit from dividends.

By contrast, share options give recipients the option to purchase their shares in the future at a predetermined price. While employees don’t need to agree to the purchase, if they choose to participate in this type of ESS, they’ll benefit from sharing in company growth with a locked-in share price.

Benefits of ESS for employers

There are multiple benefits to an employee share option plan. You’ll attract a higher level of talent by offering incentives like company equity. This option levels the playing field for smaller businesses and start-ups that might not be able to match the higher salaries of a major corporation. By offering a stake in the company through share options, you’ll give potential employees a way to share in that growth through passive income.

Shared ownership in the company also motivates employees and boosts retention rates. Employees are less likely to seek employment elsewhere if they have a direct share in the company. At the same time, they’ll be motivated to work harder to boost growth and reap direct benefits through shares and dividends.

Benefits of ESS for employees

Employee share schemes also offer benefits to the employees. When the company performs well, they’ll be compensated accordingly. An employee share option plan blends flexibility with the prospect of purchasing shares at below-market rates. For those new to investing, this provides a way to get on the ladder and start growing their portfolio. Another benefit is that employees usually won’t have to pay a brokerage fee when they want to buy or sell company shares.

ESS tax considerations

Before setting up any employee share scheme for your business, you’ll also need to think about tax considerations. The Australian Tax Office (ATO) applies tax concessions to certain types of ESS, so it’s worth looking on its website for the latest conditions. For example, employees might be able to reduce taxable income by $1,000. Concessions often apply when shares are held for a minimum number of years before selling, so be sure that you are aware of these rules before disposing of equity.

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