Employee Share Ownership Plans

Good or bad??

Just wanted to get peoples feedback on Employee Share Ownership Plans. They are an incentive that is supposed to align the interests of employees with shareholders.
ESOP’s can take many forms, often executives are offered shares and/or options as part of their remuneration package.

The Share Plan at my company has just been offered for the 07/08 financial year. This is the first financial year I have been eligible (12 month qualifying period), and would just like to share some details to get some other forumites thoughts.

(Company is multinational, listed on the FTSE and NYSE – but not ASX)

Basically, it is a 1:1 matching scheme. You buy shares in the company and they match your contribution with “free” shares up to a threshold ($5K this year).
Sounds like a winner at face value, $10K worth of shares for only $5K!!!

But…variables to consider:
Tax. (Accountants please correct my understandings if they are wrong)
You pay tax on the additional shares as if they were income. You can pay this in the year that you receive the shares, or at a later date (when you sell, or leave company etc). Note this is not CGT.

Quarantine.
The shares that YOU buy, are held in trust for 2 years, and cannot be sold or rolled into personal name. MATCHED shares are held in trust for 3 years and cannot be sold or rolled into personal name. After quarantine, shares can be rolled over to receive more “free” shares. ie. In Year 3 you can rollover your shares PURCHASED in Year 1, to be matched again by the company. This resets the quarantine period for these shares to another 2 years and does all sorts of awful things to the cost base of the shares for future CGT purposes (still haven’t fully got my head around that part yet)

Co. Performance
Australia has been having a great bull market the last few years, but I have attached the performance chart for this company since the start of 2000 till today (it is in the Oil & Gas / Energy sector). Factors to note here though, is the price is charted in AUD, but the shares are held on the FTSE in pounds, so there are FX forces at play.
I know that the share price would have to virtually halve, for me to be in the red…but I still don’t like the look of that chart…

Leverage
The credit union on site offers no deposit loans to cover the 5K purchase price. I have taken this option up, in order to not tie up any of my cash at this point in time ($10K shares - no cash down??). I fully intend on paying off the loan before 12 months, even though the loan term is 5 years. Rate is steep at 10%, but tax deductable…
How does this affect the scenario?

Dividends
Just planning to reinvest at this stage, as I don’t need the few pence per share that they pay quarterly!!

Any other points to consider that I haven’t thought of??

Thanks everyone,

Chris

 

I'm no trader, but I don't see anything scary about the chart, but knowing nothing about the company doesn't really allow me to comment anyway.

I personally like the idea of employee share option plans. Like you say, not taking into account tax, brokerage, interest costs etc, the price needs to halve for you to lose out. What if it doubles? I would just look at the fundamentals of the company, and if you would invest in them regardless of the share plan, then go for it. If you wouldn't then perhaps you should steer clear.

BR

 

CGT only applies on sale.

What if you accumulate the maximum allowed. Hold until retirement and live off the income.

Or trickle sell during retirement to take advantage of a lower tax rate.

 

If you roll them over if what you say is right thats 15k worth of shares you end up with, which not knowing the company sounds a fairly good deal if you are staying with them for a few years.

Nothing down deal even at 10% sounds good too, not sure about the tax part on what they are giving you but the interest is claimable.

 

Don't know about your company, but I'd go for it.
My wife worked for QBE for a few years, and picked up $1125 in employee shares for nix, nada, niente, nothingo, nil, ...
Those shares are now worth about $11,000, and pay her nearly $350 a year in dividends.
We don't plan to sell them, so the only tax we worry about is on the divies.

 

"I know that the share price would have to virtually halve, for me to be in the red…but I still don’t like the look of that chart…"

Chris.R_WA

Based on the chart only !
Sideways move from 2000 & range $18 & $10.
To me it's a waste of time and money (unless actively traded).
You are going nowhere so far...(IMHO).

 

Without knowing the company it may be uptrending on the local exchange just our $ value dragging it down.

 

Hi guys, thanks for all the feedback so far. Its an interesting situation...

Thats the thing BR, if I had the $10K sitting in my account now, there is no way I would invest it in this company. Not because it is a bad company, but I think the opportunity cost would be too high. There are hundreds of other things I would prefer to put the money towards (ASX shares, Navra, next IP deposit).

As Tropo says, if it just keeps trending sideways I am going nowhere...even with the 2 for 1 issue.
What if I had put in 5K in 2000, it would have been worth 10K straightaway (due to the matching)...but it would be worth only incrementally more today. What if instead I put that 5K in BHP, or RIO???

The things that swayed me in the end, were the need to diversify (gain some international exposure - even as a small % of my portfolio), and the very low monthly cost to gain the possible upside.
The company has been underforming the index and its peers over the last 24 months particularly, but I think it should be able to turn that around shortly. The long term prospects are pretty good for solid growth.

The other slightly annoying, small issue, is the supply/demand variations around the issue time. The stock does virtually nothing for 11 months, then kicks up a few percent just when everyone buys on the open market .

Oh well, I've signed my forms anyway for this year...I'll just have to monitor and decide whether I want to repeat next year. Can't cut any losses for 2-3 years though .

Cheers guys, Chris

 

Hi Bundy, its not

Its going sideways in pounds too, but the dividends are increasing and the company buys back a LOT of shares every year improve the EPS.

If the $AUS falls from its current highs, I might see some improvement...but I am still bullish on the dollar.

Chris