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Can I Give Shares as Salary to My Employees?

In Australia, it is common for companies to practise share schemes which come in two forms: Employee Share Schemes (ESS) and Employee Share Option Plans (ESOP). Both schemes benefit the employer as they can attract and retain top talent, and the employee can create a sense of ownership and involvement in the company.

Generally, an ESS is more flexible than an ESOP as it can be tailored to the business’s specific needs. On the other hand, an ESOP is a more structured scheme that must comply with certain statutory requirements.

Startups, for instance, can incentivise employees by offering to pay them with shares rather than drawing from their cash flow. Because these schemes are regulated by the Australian Taxation Office (ATO), a few conditions in commercial law must be met for the arrangement to be compliant.

If you are considering offering shares as salary to your employees, it is best to seek advice from a commercial law firm to ensure that you comply with all the relevant laws. Madison Marcus is the leading commercial law firm in Sydney and can advise you on the best way to structure your share scheme.

What Is an Employee Stock Option?

In Australia, an employee stock option is known as the employee share option, which is the right (but not the obligation) to buy shares in the company at a set price (the strike price) during a certain period (the vesting period). After the employee has exercised their option and purchased the shares, they will become a company shareholder.

Depending on the company’s interests, the employer can choose the best share scheme structure that will work for them, whether the ESS or the ESOP.

An ESS is an arrangement between a company and its employees whereby the employees are granted shares or rights to acquire shares in the company. The shares or rights are generally granted at a discounted price and are subject to certain restrictions (e.g. a vesting period).

An ESOP is a type of ESS that gives employees the right to purchase shares in the company at a fixed price (the strike price) during a certain time (the vesting period).

The ATO has set out the following rules aligned with commercial law that must be met for an employee share option to be compliant: 

  • The shares must be quoted on a recognised stock exchange
  • The company must be a resident of Australia
  • The choice must not be exercisable more than 10 years from the date it is granted.

Generally, employee stock options can only be offered to key employees or executives. This is because employee stock options can significantly impact the company’s share price, so they must be carefully managed. However, they can also be offered to other employees as an incentive or bonus.

Types of ESOPs in Australia

  1. Fully Paid Non-Voting Share Scheme

The employee is given shares in the company where they work, with full voting rights. The employee does not have to pay anything for these shares.

  1. Partly Paid Share Scheme

The employee is given shares in the company but only has to pay for part of the shares. The company makes the balance of the payment.

  1. Unlisted Option Scheme

The employee is given the option to purchase shares in the company at a future date. The shares are not listed on any stock exchange.

  1. Listed Option Scheme

The employee is given the option to purchase company shares listed on a stock exchange.

How Do Stock Options Work?

Employee stock options give the employee the right, but not the obligation, to purchase shares in the company at a predetermined price. 

But how does this work? 

After choosing the best share scheme, employers will offer the employee an option to purchase shares in the company. This option is known as the grant price and is usually the market price of the shares when the option is granted.

The employee will have a set time, known as the vesting period, to exercise their option and purchase the shares.

The options can be exercisable at any time during the life of the option or they can be subject to a vesting period. A vesting period is when the employee has to work for the company for a certain amount before they can exercise their options.

Employees will purchase the shares at a predetermined price if they use their options. They can hold onto them or sell them on the open market. If the shares have gone up in value when they exercise their options, then the employee will make money from selling them. 

On the other hand, if shares have decreased in value since being originally granted, that would result in a loss for the said employee.

How Do Stock Options Incentivise Employees?

Employee stock options give employees an incentive to stay with the company and work hard to improve the company’s performance. This is because they stand to make a profit if the company’s share price increases.

Stock options ensure that employees’ interests are in-line with shareholders by giving them a cut of the profits if, and only if, the share price goes up. This system effectively motivates employees to help increase shareholder value.

Employees typically don’t have to pay taxes upfront on their shares or options. They only become liable to do so when they gain a financial benefit from the shares, such as when converting their options into actual shares. When this happens, the employee will be taxed on the difference between the market value of the shares at the time they were granted and the market value of the shares at the time they were sold. This is known as capital gains tax.

What Are the Benefits of Offering Employee Stock Options for an Employer?

The company has various advantages when using an employee share option plan or employee share scheme.

  • Increase in shareholder value
  • If the company’s share price increases, then so do the value of the employee’s options. This provides a financial incentive for employees to work hard and improve the company’s performance.

  • Recruitment and retention of top-performing employees
  • Employee stock options are often used to attract and retain only the most driven employees. When those individuals are incentivised to stay with the company, they’ll be less likely to leave for a competitor.

    How Madison Marcus Can Help You

    One way to attract and retain great employees is by offering share options. This can be especially beneficial for startups that may have budget constraints. However, navigating the world of commercial law can be difficult. That’s where our expertise as a commercial law firm comes in.

    Madison Marcus is a leading commercial law firm in Sydney. We have a team of experienced lawyers who can help you with all aspects of commercial law, from setting up your employee share scheme to advising you on the best way to structure it.

    For all enquiries, contact us here


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