Employee share ownership plans: Current practice and regulatory reform

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Current projects

Recent developments on employee share schemes
There have been a number of developments in relation to employee share schemes. On 14 August 2009, the Government released draft legislation to reform the taxation of such schemes. The draft legislation follows a short consultation period following an initial announcement in the 2009 Budget. The consultation was carried out by Treasury and the Project’s Chief Investigators Ann O’Connell and Ian Ramsay made a written submission. A copy of the submission is available at: http://www.treasury.gov.au/documents/1573/PDF/Professor_Ian_Ramsa_%20and_Associate_Professor_Ann_OConnell.pdf

On 17 August 2009, the Senate Economics References Committee handed down its report on Employee Share Schemes. The majority report called on the Government to await the result of a number of ongoing inquiries before introducing the proposed legislation. Ann O’Connell gave evidence at the Senate Committee’s hearings and the work of the Project is quoted at length in the majority report. A copy of the report is available at: http://www.aph.gov.au/Senate/committee/economics_ctte/employee_share_schemes_09/report/index.htm

An article by Ann O’Connell on the draft legislation was published on 20 August 2009 in the Australian Financial Review. A copy of the article is available here.

Trends in employee share ownership plans in publicly-listed companies
While we know many publicly-listed companies in Australia have broad-based employee share ownership plans, we know little about how such companies are structuring their plans. This project seeks to analyse current market trends in employee share ownership plans. The project will examine how large publicly-listed companies in Australia are structuring their broad-based ESOPs. This analysis will include, for example, what percentage of equity is made available to employees through ESOPs; the type of security issued; whether a trust is used to administer the plan; rights attached to the equity issued; source of finance for the ESOP and eligibility requirements. It will also seek to ascertain whether companies are structuring their ESOPs so as to access the concessional taxation treatment available under Division 13A of the Income Tax Assessment Act 1936 (Cth).

This project involves administering a survey to all companies listed on the Australian Securities Exchange (ASX). The purpose of the survey is to obtain detailed data on the types of companies with broad-based employee share ownership plans, and their objectives and practice in relation to these plans. The survey also seeks to obtain company views on the adequacy of the current regulatory framework in taxation and corporations law.

Employee share ownership plans: why do employees participate?
The primary aim of this research is to understand why employees participate or decline to participate in employee share ownership plans. Research on ESOPs to date has tended to focus on associated organisational outcomes, with some research pointing to a range of positive outcomes (eg. higher job satisfaction, organisational commitment and improved organisational performance). The benefits of ESOPs are more likely to be realised when a significant proportion of employees acquire shares under the ESOP. However, very little is known about employee motivations for share acquisition though an ESOP. Why do employees take up shares in their own organisations when it is possible to buy shares in other, perhaps better performing, organisations through the share market? Do employees take up shares for financial returns or because of a desire to participate more in the decision-making processes of the organisation? Based on the data collected through interviews with HR managers and trade union representatives in Australian companies, we will develop a survey which will investigate why employees take up shares in their organisation. The survey will be administered to employees in companies that offer broad-based employee share schemes.

Employee share ownership plans in small and medium-sized enterprises
Small and medium-sized enterprises (SMEs) are much less likely to have broad-based employee share ownership plans than their larger counterparts. The lack of diffusion of employee share schemes in SMEs presents a formidable obstacle to government attempts to promote the take-up of employee share ownership plans in Australia. It also means that the majority of employees in Australia do not have the opportunity to own shares in the companies for which they work. It is widely recognised that employee share ownership in the SME sector is qualitatively different from that in larger enterprises and that the current regulatory regime may be ill-suited to serving the objectives for which ESOPs are introduced in SMEs. This research will investigate current objectives of SME owners in implementing ESOPs; how employee share ownership in SMEs is being implemented and structured; and how the current regulatory regime structures and constrains the use of ESOPs in this sector. This project will also examine how employee share ownership in SMEs is regulated in other countries, such as the United Kingdom and the United States.

On 2 April 2008, the Employee Share Ownership Project hosted a day-long workshop on the regulation of employee share ownership in SMEs. The workshop invitation and final program are available here. Attended by legal pratitioners, regulators and academic researchers, the workshop discussed objectives for, and current practice in, broad-based employee share ownership in Australian SMEs. Participants identified and discussed a number of regulatory obstacles to broad-based employee share ownership in this sector, emanating from corporations and taxation law. Proposals for reform were also discussed. A research report, informed by the workshop and supplementary research, will be made available.