Monday, 9 January 2012

Profiting from your employee share plan

An option that became available to me for the first time last week was participation in my company's employee share acquisition plan which I looked into in a lot of depth. The terms were amazingly favourable so I thought I would be crazy not to sign up to the greatest extent possible. I therefore decided to put together a checklist for all those who are wondering whether to sign up to their employee share plans

There are several pieces of information you have to gather before deciding a) whether to participate and b) how much of your income to dedicate to the plan. These include


  • The discount: The discount is the single most important number when considering whether to invest in your company's share plan. A 10 - 15% discount generally gives a great return and are relatively common for employee share plans

  • The price the discount is applied to: The most optimal outcome is for the discount to be to the lowest share price over a period. This is unlikely however so another good outcome is for the discount to be the lower of the start or the end share price. If the discount is to the highest price in the period or the higher of the start or end share price then you are open to the possibility that you will be paying more for the shares than they are worth when they are issued to you

  • How often you get the shares: Generally funds are taken out of your pay packet and then invested in the stocks every quarter / half year / year. The more frequent it is the better as it reduces the hold cost of the cash while you're waiting for the funds to be invested

  • Your personal cost of funds: If you would ordinarily use the cash allocated to your share plan for savings at say 7% then this would be your cost of funds. Personally my cost of funds is lower as I would use it to offset a 7% cost of debt (after tax refund my cost of funds is more like 4.2%)

  • Tax implications in your jurisdiction: I have no idea what the tax codes are like in the US / UK etc but in Australia if you hold an investment for 12 months you get a 50% discount on the capital gains. However if the shares are issued at a discount then you have an upfront tax liability associated with the discount. The incentive is to therefore cycle the shares straight away.

The best thing about employee share plans is that you can put in place a plan whereby you may get essentially a substantial riskfree return. For example if your discount is 15%, shares issued every six months, with a personal cost of funds of 2.5% p.a. and no tax benefits to holding the shares - everytime you get issued the shares you should sell them straight away and get an annualised pre-tax return of (15% - 2.5/2%)*2 = 27.5%. This is an outstanding return in it's own right however when you consider that it is essentially risk free it becomes an unbelievable return!


Most employers will limit how you can contribute to these schemes. If I had a choice I would be putting all my investment funds into it!

No comments:

Post a comment