Employee Share Schemes – Introduction

Are you an employee being invited to participate in an employee share scheme? Or perhaps you are an employer considering an employee share scheme as part of the remuneration package offered to employees. If so, read our three article series to get an overview of employee share schemes (“ESS”).

ESS enable employers to remunerate their employees with shares in addition to their salary. The company confers on the employee a ‘grant’ of options over a specified number of shares, which become available at a predetermined rate to the employee (i.e. ‘vest’) on nominated dates. They are often issued with an exercise price (also referred to as the ‘strike price’) equal to the market price (calculated at the date of grant). The employee can benefit from an increase in the share price between grant and vesting by buying the shares at the exercise price, thereby accruing the difference between that lower price and the current market price. Vesting conditions may include employees having worked for a certain time period and/or employees having satisfied certain Key Performance Indicators (for example attaining sales targets).

ESS are fundamental in remuneration packages for start-ups, particularly in the technology sector. Typically, these companies substitute options schemes for higher cash salaries and bonuses. The granting of options is therefore an economical way of attracting and incentivising talent as they align the interests of the employee and the company.

ESS have been regarded as an ‘arrangement’ or condition collateral to the contract of employment or as part of the contract or arrangement of which the contract of employment also forms part. Employees have accordingly challenged the terms upon which their contract of employment was terminated including the amount of options exercisable on grounds of unfairness under the relevant industrial relations legislation.

The characterisation of ESS becomes important when considering appropriate remuneration after an employee’s cessation of employment. Are they rewarded for past performance or do they seek to ensure the retention of staff? In particular, how should employees be remunerated in accordance with these share option schemes upon termination of their contract?

In Bell & Anor v Macquarie Bank Ltd & Anor (2002) 117 IR 281 (“Bell”), Schmidt J stated that schemes which are implemented to ensure the retention of staff are not of themselves conceptually unfair.

The next two articles in this three article series will explore these issues in relation to cases heard before the Industrial Relations Committee of New South Wales.

If you are either an employee who has questions about ESS or an employer considering an employee share scheme as part of the remuneration package, feel free to contact us for a free consultation on (02) 9262 5495 or (03) 8899 7870, or visit our website at www.mclp.com.au or like our Facebook Page at http://goo.gl/Jx2hdO.

This article is not legal advice and should not be relied upon as legal advice. All articles found on this website are intended to provide informative information, nevertheless, in many instances legislation and case law has been simplified and/or paraphrased. If you would like personal legal advice based on your current circumstances, you should contact MurdockCheng Legal Practice for a free consultation.