4 Formal Employment Share Scheme Alternatives to Incentivise Employees


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DATE PUBLISHED: January 27, 2022

key takeaways

  • Providing an incentive to employees can be highly beneficial for employers and their company.
  • A formal Employment Share Scheme (ESS) has been the preferred method of incentive, although recently employers have been seeking alternative options due to complications from ESS conditions, requirements and tax implications.
  • We discuss 4 simpler incentive types - phantom equity, discretionary bonuses, employee share trust, and loan funded share plans.

As an employer, giving your employees an incentive to remain with your company and align their interests with that of the business can be a major benefit. The most common form of incentive is an Employee Share Scheme (ESS), which can assist in providing incentives to employees of a business by offering them shares or an option to acquire shares or other interests in the business.

However, in the current market, there's been an increased desire to provide incentives to employees, and a decline in choosing to do so with a formal ESS. Why? We're about to find out.


An ESS is defined as a scheme under which ESS interests in a company are provided to employees or associates of employees of:

  • The company; or
  • Subsidiaries of the company,

In relation to the employee's employment.

An ESS interest is:

  • A beneficial interest in a share in the company; or
  • A right to acquire a beneficial interest in a share in the company.

There are additional concessions that may apply to ESS interests in start-up companies. Some of the key conditions for these concessions include:

  • The issuing company must have been incorporated for less than 10 years;
  • There must be broad availability of the scheme to at least 75% of the permanent employees with at least 3 years' service;
  • Shares are issued at no more than 15% discount or, in the case of options, the option exercise price must, at a minimum, be set at the current market value of the shares; and
  • The employee must not beneficially own shares in the company, or control its voting power, beyond a 10% limit.

The conditions and requirements for a company to provide their employees a formal ESS, alongside numerous tax implications, begs the question: are there any simpler alternatives?

The answer is, yes. In today's workforce, employer's are actively seeking new ways to provide incentives to their employees - turning to the non-traditional, non-tax conforming, "Claytons" schemes. Below, we outline the most common of these alternative types and how employers can use them.


Phantom equity

Phantom equity usually involves a contractual agreement between a company and an employee to provide a right to a cash payment in the future, which payment is linked to the company's market value (or an increase in the market value).

For Corporations Act and tax purposes, this is usually not an "employee share scheme" and would generally be taxed as ordinary income of the employee.

If the proposed phantom equity arrangement is to be offered to a single employee (i.e. it is a one-off arrangement), it could be documented in the employment agreement or a separate agreement between the employee and the company. If the arrangement is to be offered to a number of employees, a document setting out the terms of the arrangement, including calculation of any payments, etc, can be prepared.

When considering phantom equity, the company should:

  • Give thought as to how the arrangement may replace or be supplemental to any existing bonus arrangements;
  • Consider how long the arrangement may last – i.e. is it a one-off payment, an annual payment, etc;
  • Any triggers for payment; and
  • Consider whether there is to be any dilution of the phantom share/s interest.


discretionary bonuses

A discretionary bonus is a popular option for incentivising employees.
Generally, the company will have the discretion to pay a bonus to an employee.

Discretionary bonuses have come under scrutiny in recent years, with employees taking the view that the entitlement to the bonus has crystallised and the employee is entitled to receive the payment.
The fact that a promise to pay the bonus is discretionary does not necessarily mean the obligation is non-contractual or uncertain so as to be unenforceable.

When determining whether or not to pay a discretionary bonus, an employer must exercise the discretion honestly and not unreasonably or arbitrarily.


Employee share trust

This option involves a trust acquiring and holding shares on behalf of employees.

The company makes a cash contribution to the trust to fund the acquisition of shares, allowing the employer to obtain a deduction for its outlay/contribution.


Loan funded share plans

The employer/company will make an interest free, limited recourse loan to the employee allowing the employee to purchase the shares at market value.

The limited recourse nature of the loan means that if the share value decreases, the shares can be returned, and the loan does not necessarily have to be repaid.

other matters to consider

If a company intends to provide benefits to an employee, funding to acquire shares in the company or other accommodations in connection with the incentives, the company should consider:

  • The whitewash provisions in section 260A of the Corporations Act; and
  • Fringe benefits tax issues.


If you're looking for an alternative to a traditional, conforming ESS, then the 4 options above are something to seriously consider. Though the traditional, conforming ESS has been the go-to over the years, its complicated conditions and requirements can make something as simple as wanting to create greater incentive for your employers a harder task.

The 4 alternatives we have discussed today are valid and effective incentive types. When structured correctly, they can benefit both yourself as an employer and your employees.

how can we assist you?

McInnes Wilson Lawyers can assist in structuring your incentive arrangements for your employees as well as the interactions with employment agreements.

If you require any assistance or have any questions,  please fill out the enquiry form below and mention this article for an obligation-free appointment.

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