Advantages and Disadvantages of Giving Employees Share Ownership
Employee share schemes are designed to give employees a share ownership in the company they work for. This can be structured in various ways and may involve the employee receiving the shares or options in the company. The shares can be issued for free, for a discount below market value, or at full market prices. In addition, the schemes could involve finance provided by the employer and/or performance hurdles before the employees receive the shares.
The majority of Australian Stock Exchange listed companies have employee share schemes in operation. Many small family run companies also have an employee share scheme in operation to convert the employees into business owners as well.
The advantages of employee share schemes for employers include:
- Motivates employees to become more productive.
- Recruit or retain key employees.
- Can compensate for lower salaries.
- Provides tax efficient remuneration for employees.
- Increases loyalty and reduces staff turnover.
- Can raise working capital.
- Aligns the employee and employer’s interests.
The disadvantages of employee share schemes include:
- Administration costs can be substantial.
- A falling share price damages employee morale, retention and motivation.
- Dilution of share ownership.
- Employee shares in an unlisted company are hard to value and sell.
Employee share schemes can be very tax effective for both employers and employees. For example, each employee could receive $1,000 of free shares each year while the employer also receives a tax deduction for this amount.