Employer Share Schemes – 4 things you need to know

Several of our clients are in the fortunate position of participating in employer share schemes.

As many schemes enter their last trading window for 2020, we discuss some of the key issues and considerations for employer share scheme participants so you can make the most out of your investments.

These can be structured in different ways, and depending on your circumstances, may have different implications for you.

What are Employer share schemes?

This is the chance to participate in your employer company’s performance and growth by owning or buying, or being given shares in, the company. In many cases, an employer will incentivise staff to participate by offering these shares at a discounted price or matching employee contributions.

It is also a good way for a business to retain staff, promote loyalty and motivate you to perform.

Every company will have a slightly different scheme, but most often it will be one of the following:

• Shares: you may be offered the opportunity to buy into the company at current market rates or at a discount to the current rate. Some firms will offer a loan facility for you to buy the shares. This is more common for companies that are not listed on a stock exchange.

• Options and Restricted Stock Units: These are usually subject to a vesting period of 3-5 years. A vesting period is a time in which the share is similar to an ‘IOU.’ Once a stock option is vested, you can exercise it so that you own the actual shares, or you can sell it for the equivalent stock price at the time. Options may also have other conditions related to performance, or continued employment.

• Invest as you earn schemes: many companies offer the opportunity to put aside some of your income towards buying company shares.

• Share incentive plans: Another structure is where ordinary shares are provided as a bonus instead of, or as well as a cash bonus.

With all types of employee participation schemes, it is important to note that there will most likely be conditions on when the employee can sell their shares, within ‘trading windows’ at specific times during the year and subject to conditions that prevent insider trading.

Benefits of share schemes

We have seen many clients benefit from participating in their company share schemes.

It can a very effective way of growing your wealth and benefiting from your employer company’s strong performance.

You may feel that your hard work can directly impact your growing wealth beyond your salary and savings.

You might also think that as you know your company and how it is performing you can assess how your investment might perform.

The share schemes often give you the opportunity to purchase the shares at a discount to the current market price, giving you an upside potential.

We have seen clients build substantial wealth in these schemes.

Risks associated with share schemes

The main risk is concentration risk. Concentration risk is when you have too many assets in one place or too much financial reliance on one source.

Concentration risk exists if you are reliant on a company- your employer- for your income, that you need to live month to month, and you are reliant on that same employer for your pension contributions that your retirement plan is largely contingent upon, and you have a substantial amount of your investible assets in the same company in the form of shares.

If something happens to that company, or to the industry they work in, you may in one instant lose your salary, your pension contributions and potentially your investment.

This is not just hypothetical. This example is repeated by permission from one of our clients we assisted. In December 2019, this client was working for a successful airline company, receiving maximum pension contributions and investing in the airline share incentive plan. We advised against the concentration risk and they diversified their investment portfolio accordingly. It was fortuitous because, just 4 months later, due to the external impact of Covid 19, this client was made redundant, losing their salary and pension contributions and the stock price fell 35%. By diversifying their investments, their concentration risk was reduced, and their investment capital better preserved.

Share schemes are not a guaranteed way of building your wealth. Shares can go up or down in value. You might find the share price in the future is lower than what you paid for them. If you are granted options and your strike price is higher than the current market value, your options could expire worthless. The greatest mitigator of the risk of decreasing value, is time. That is, on average, shares tend to increase in value over time; but not all shares, not at the same rate and not at the same magnitude.

Whilst the risk may be lower, should your company close down, go into liquidation or face bankruptcy, you may find your shares are suspended, or actually worth nothing. There is a risk that your shares could become worthless.

4 important actions to take with your company share scheme

1. Know your trading windows

When you participate in an employer share scheme, you usually cannot sell your shares whenever you want; you are restricted to a few defined ‘trading windows’ each year. Make sure you are aware when these are so you can plan ahead and manage your assets in the scheme in the context of your broader finances and long term financial plan.

2. Diversify

We mentioned concentration risk above. A way to limit this is to have a structured plan to optimise your company share engagement. Consider, where appropriate for you, to diversify your wealth by selling your unrestricted shares as they become fully vested and invest them in diversified assets in line with you goals and targets. Before you do this though, see point 3 below.

3. Get independent financial advice

If you are participating in an employer scheme, it needs to be considered alongside your other assets and relative to your goals and targets. Get independent financial and investment advice so your company share assets can be optimally employed to help you achieve your goals. You can speak with us to talk through your situation as we have helped many clients in this situation.

4. Get tax advice

The taxes on your employer share scheme can be complex and may be different depending on your tax residency, your citizenship, and potentially where the stock is listed.

It may also be dependent on the form in which you received and paid for them, and on their structure.

In many countries in Europe shares may be taxable as part of your income on receipt of the shares, whereas an option may be taxable only on exercise of that option, that is the delivery of the shares that the option provides the right to acquire. But it can be different across Europe and we strongly advise you to get tax advice before making any decisions.

In summary, share schemes can be a great opportunity to build your wealth, but they should not be your principal source of wealth and are not a guaranteed path to growth either. You should consider them in the context of your broader goals. You need to be aware of restrictions such as how long they take to invest, and the limited trading windows.

Every employee should understand the value that they bring to a company and feel that they are suitably rewarded for their contributions to success, but always consider the potential damage to your financial well-being if your employer is struggling.

Always ask yourself if you would have the same amount of money invested in that company if you didn’t work there. If the answer is no, you should reconsider your position.

Where appropriate for your situation, you can consider diversifying your assets but before you do anything, get good financial and investment advice and take tax advice so you know the potential impacts of all courses of action.