4 tips to better manage your employee share scheme

Employee share schemes can be an excellent way to be remunerated. They are seen as highly motivational and can incentivise performance. However, when talking to professionals involved in employee share schemes, people often seem to complain about significant stress.

This is most commonly due to the uncertainties around tax and the decisions required to manage the shares effectively.

If you have an employee share scheme, follow these four steps and you should able to reduce any stress involved and maximise the benefits you receive from the scheme:

Step 1: Think of employee shares as a long-term bonus that will be taxed

The majority of employee share schemes do not incur any tax when they are granted, which often generates considerable excitement for employees involved. It inevitably leads to a plan for what will be done with all the money.

The bad news is that these shares will be taxed at your marginal tax rate when they vest or become eligible for sale. This can cause a significant problem as the tax liability won’t be known until you lodge that year’s tax return. It could be over a year after the shares have been sold; the money may have been spent on holidays, renovations, paying off the mortgage, or investments.

You should therefore factor in losing half the value of your shares before you start thinking about how you spend the money.

“As a tech professional in a critical stage of your working life, you need to think, plan and behave differently to take advantage of your unique position” Mike Sikar.

Step 2: Consider selling a portion of the shares at vesting time

Most people on an employee share scheme have a 3 or 4 year vesting period and the tax is payable as the shares vest.

By selling some of the shares at vesting time, you will be able to cover the tax bill that you will soon receive and have some money left over to achieve the goals you’ve identified.

You also need to evaluate the risk of the shares falling in value. 

Tech stocks have had an amazing run on the share market for many years until recently where many big companies have faced big declines due to rising inflation and interest rates.  

“My advice to anyone involved in a start up company is the minute you have liquidity, sell half. It’s not a vote of confidence against the company to diversify.” Martin Eberhard Co-founder of Tesla Motors

Pro Tip – You have 30 days after the vesting date to transfer the stock to your low-income spouse’s name if you want to hold onto the stock.

Step 3: Use the remaining sale proceeds to reinvest smartly

With the additional money that you now have available, you can either pay down debt or invest in your spouse’s name inside a trust or even in superannuation.

By doing this, you will build up your assets in a structure that can better protect you and minimise future tax. 

Step 4: Diversify to increase your chances of financial success

Now that you have the money in the right investment structure, it is important to invest in the right asset allocation to significantly reduce your risk and greatly improve the likelihood of achieving your financial goals.

If you retained your company shares, you’d build up massive risk that this one company will underperform or fail, thereby reducing your wealth significantly. Your income is already tied to your employer, so don’t tie your whole financial future to them as well!

By following these four steps in managing your employee share scheme, you’ll have a plan in place for dealing with the shares every time you receive them.

Mike Sikar

Founder & Principal Advisor

I’ve been a leader and innovator of the financial services industry for almost two decades, as a stockbroker from 1997 – 2007 and as a financial advisor from 2008.

Managing money comes down to basic psychology-understand how it works, know what you want it for and consistently apply the key principles to get the most out of it.

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