The Value of Employee Share Schemes

One way to attract, retain and incentivise talent is to give your employees an opportunity to participate financially in the growth of your business. One way to do this is to set up an employee share scheme, the benefits of which include:

• focusing staff on the long term objectives of the business and therefore driving profit;
• providing a cash-free source of remuneration and reducing pressure on cash flow; and
• providing a succession route where owners can look to financially exit the business in a controlled manner.

Historically, employee share schemes in NZ have been the domain of the big corporates due to the costs and complexities of putting them in place. This is no longer the case, with changes to the rules making it easy and cost effective for smaller private companies to use such schemes. Certainly in our practice we are seeing a growing trend of clients looking to implement employee share schemes to drive staff engagement and offer a controlled exit to business owners over the medium to long term.

Employee Share Loans

When it comes to choosing the structure of an employee share scheme there are a number of options, but due to its simplicity the most common is the ‘employee share loan.’ Under this structure, the company provides an interest free loan to the employee to buy the shares at market value. Employees repay the loan out of dividends paid on those shares, bonuses issued, or from the future share sale proceeds in the event of a sale. These schemes can be established with rules to:

• restrict the ability of the employee to sell the shares whilst employed;
• set KPIs (profit, market share, time-based hurdles) and other measurable targets that must be met before full ownership in the shares is transferred; and
• provide a disincentive for a scheme participant to leave their employment before the end of a defined period (known as the ‘vesting period’).

NB: An employee who leaves prior to the end of a vesting period is often referred to as a ‘bad leaver’ and are obligated to sell back the shares at the original loan value.

Who should be offered shares?

There is a tendency to only offer the scheme to employees at senior management level, however, businesses should consider offering participation to any talented employee who can help the company grow, or as a tool to attract, incentivise, retain and reward an employee.

What are my shares worth?

Another key consideration is the market value of the shares. Any business putting a scheme in place will need to work out a realistic valuation for the business. If they set the price too high thereby driving up the value of the loan it provides very little in the way of incentive to employees.

Let’s get started:

If you think an employee share scheme could be of benefit to your business, whether by way of assisting to drive growth or providing a controlled exit to existing owners, get in touch with us today. We can help you decide which type of scheme would best suit your business, who you should offer the scheme too and what conditions you would place on employees before final transfer of shares occurs.