Should I Buy Into My Company’s Employee Share Schemes?

Employee Share Schemes (ESS) give employees the opportunity to purchase company shares as part of their employment benefits, salary package, promotion bonus, or retirement option. Depending on the terms of the agreement, the company’s financial status, and your career plans signing up for an ESS may be one of the best decisions you’ll ever make.

Getting the Shares

Providing ESS is a way of aligning the employee’s interest with the company’s targets. Companies also use this to motivate and increase their employees’ productivity by making ESS part of an incentive program.

Holding a share means owning a part of the company, no matter how small it may be. It gives you a certain degree of ownership which strengthens your sense of commitment and responsibility to your work. Your motivation will start to take roots in thinking that the better your performance is, the more you contribute to the company’s success, and thus the better returns you get from the rising stock price.

Your company may or may not have this option but when they do, they usually offer it through the following ways:

  • Offered as part of a contract that ties you to the company for a specific period of time
  • Paid through salary deduction in tranches
  • Offer shares at a discount to be paid upfront
  • Part of a performance bonus to promoted individuals instead of compensating them with higher salaries

Any regular employee may be given an option to buy and invest in the company’s shares. Most established companies offer common shares as an equity investment, expecting to give employees capital gains as the stock price rises. Smaller companies, however, may give only ‘pseudo’ shares that regularly pay dividends but do not have the associated voting rights during stockholder meetings.

Typically, ESS agreements last for 2-15 years, depending on the company’s financial stability. When your company offers an ESS or you’re thinking of getting into one, make sure you get information on the following from your employer:

  • Why are you given the option to purchase shares?
  • What are the benefits of getting into the program?
  • How can your performance affect the company’s goals and, consequently, its share price?
  • How valuable are the shares and how is the price determined?
  • How to track the share’s price progress?
  • When can you buy/sell shares?
  • What happens when you resign?
  • Are there instances where your shares may be forfeited by the company?

These are some of the most important questions you need to ask your employer about before signing any agreement.

Advantages

Companies typically use ESS to attract more employees, retain loyal ones, and motivate new hires to add more value to the company. This is a very interesting option, especially if the company is experiencing a boom in growth.

Aside from purchasing the shares at a lower price, you also get to enjoy buying without having to pay for brokerage or other transaction fees. Purchased options may also be eligible for tax benefits depending on the ESS policy.

With established companies existing for years in the market, stock options provide a certain amount of security to employees. Those who want to work with the company until they retire often see this as a good investment opportunity to add to their retirement fund.

For those who are working with a startup company, it’s exciting to have a sizable share of an organization with the potential to fly as high as Facebook when it publicly listed. Riding the stock of a rising company can give insurmountable gains when its price skyrockets.

Disadvantages

Unlike owning publicly listed shares of the company through a brokerage firm, more access constraints are placed on shares offered through ESS. For one, there’s usually a window or timeframe when you’re allowed to buy or sell your shares. You also have to get the approval of your company to complete transactions. If the purchase is done through a staggered payment scheme, employees are not allowed to sell the shares until full payment is completed within the agreed period of time. If the shares are issued based on performance milestones, you’re required to meet performance targets or sign employment bonds before all of your purchased shares are released.

Some companies will even force you to return the shares or sell them at spot rate upon tendering your resignation, depending on the terms detailed in your purchase agreement.

Conclusion

ESS are attractive options that have a lot of potential upsides. The promise of getting a stock at the early stages before it rises is the most exciting part, especially for investors who are versed in how the stock market works. However, the stock market is a rollercoaster ride wherein you can get to the high ground at one point, only to find yourself at the bottom pit the following day.

Before purchasing stock options offered by your company, do your due diligence in looking at the financial statements, investor outlook, and market sentiment on the company. Determine whether you really are buying discounted share prices of an undervalued company or you’re riding a sinking ship.

Consider also your financial situation before getting into an ESS. Going for a salary deduction in return for purchasing shares may not be the best idea if this will put you in a bind in paying your bills and other financial responsibilities. Instead of paying for the shares, you may be better off putting it in a super or other investment vehicles.

Always study the fine print of your share purchase agreement and see if it’s in line with your career plans. If you see this solely as an investment opportunity, make sure you study when you can buy/sell shares, what happens to your shares when you resign, and if you’re eligible to receive dividends. Otherwise, if you plan to stay at the company until your retire, signing up for an ESS is a sound decision.

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