GRG Remuneration Insight 113

by Chris Godfrey & James Bourchier
Contributors: Denis Godfrey, Nida Khoury & Peter Godfrey

Introduction

This is one in a series of GRG Remuneration Insights dealing with general employee equity plans (GEEPs). These plans are made available to the majority of full-time Australian employees (and part-time in some cases); and often operate on a salary sacrifice basis with matching by the company.

GRG undertook extensive research on market practice in relation to GEEPs and this Insight presents the findings related to the practices of the ASX100 companies. Copies of GRG Remuneration Insights providing additional GEEP information are available on a complementary basis on this website.

There are four basic GEEPs being:

  1. Shares Save Plan (SSP) – see Insight 109,
  2. $5,000 Salary Sacrifice Share Plan (SSSP) – see Insight 110,
  3. After Tax Employee Contribution Plan (ATECP) – see Insight 111, and
  4. $1,000 Tax Exempt Plan (TEP) – see Insight 112.

In addition to the above there is limited use of other variations including:

  1. Additional Benefit Rights Plan – where share rights are granted to employees as an additional benefit usually with service or other vesting conditions applying, and
  2. Additional Benefit Share Plan – where shares are granted to employees on a matching basis in relation to contributions made to a SSSP. These shares are usually subject to service or other vesting conditions.

Background

The Australian Government has for many decades been persistently supportive of share-based remuneration and benefit programs irrespective of which political party has been in power. Furthermore, directors of many public companies have been supportive of GEEPs as they see that benefits can arise for shareholders as well as employees.

On 13 November 2018 the Federal Treasurer announced plans to make GEEPs more widely available to employees of unlisted companies by reducing red tape. In this context we felt that it is timely to research the listed companies’ market practice in relation to GEEPs as they have for some time been free from the burden of excessive red tape; and therefore, may provide an indication of how much impact the planned changes will have on the incidence of GEEPs.

We commenced this research with the ASX100 as this group tends to be market leaders in terms of both adoption of employee benefits programs and disclosure of their general employee equity practices to determine if disclosure is sufficient to enable meaningful analysis or whether a tailored survey needed to be undertaken.

Research Group

Of the ASX100 companies (as at October 2018) researched, we excluded 7 overseas companies with a listing on the ASX as their practices tend to be more representative of the country of their head office rather than the Australian practice. Of the remaining companies, 38 did not have a GEEP and 7 were unclear as to whether or not they had one. Accordingly, the analysis relates to the balance of 48 companies that have GEEPs.

Of 100 ASX100 companies, 38 did not have a GEEP and 7 were unclear as to whether or not they had one; our analysis relates to the balance of 48 companies that have GEEPs

Plan Type Usage

Overview

The following table presents the incidence of plan type usage.

Incidence of plan type usage amongst the ASX100 companies in our analysis

The following table shows the combinations of plans types used.

Combinations of plan types amongst the ASX100 companies in our analysis

$1,000 Tax Exempt Plan (TEP)

Shares Rights or Options TEPs can use shares, rights or options. However, the dominant market practice is to use shares as indicated by the following table.

Dominant ASX100 market practice is to use shares over rights or options
New Issues or On-market Purchases

The sources of the shares for TEPs is not clearly reported by companies, however, GRG’s experience indicates that there is a mixture of practices with some companies using new issues and other companies using on-market purchases.

Benefit or Salary Sacrifice

In the majority of cases, the TEP benefit is provided as an additional benefit for employees. Sometimes the amount is determined by reference to company performance with the full $1,000 discount being provided when the company has had a good year and less than $1,000 when the company has performed less well.

The following table indicates the incidence of salary sacrifice funding (no additional cost to the company) and when the benefit is funded by the company. It is interesting to note, given the maximum tax-free benefit of $1,000, that a combination of salary sacrifice and additional benefit occurs in 6% and could potentially arise in 12% of cases depending upon Board determinations.

Incidence of salary sacrifice funding and when the benefit is funded by the company
Whether Alone or as Part of a Multi-plan Offering

The following table indicates that TEPs are usually offered as a single stand-alone plan. However, a significant number of companies supplement the TEP with an SSSP.

TEPs are usually offered as a single stand-alone plan with many supplementing the TEP with an SSSP

It should also be noted that many companies have chosen not to use a TEP but have used other GEEPs sometimes in combination with a SSSP.

$5,000 Salary Sacrifice Share Plan (SSSP)

Shares Rights or Options

The taxation requirements for this type of GEEP require restricted shares to be used.

New Issues or On-market Purchases

The sources of the shares for SSSPs is not clearly reported by companies, however, GRG’s experience indicates that there is a mixture of practices with some companies using new issues and other companies using on-market purchases.

Benefit or Salary Sacrifice

The taxation requirements for this type of GEEP require salary sacrifice to be used.

Whether Alone or as Part of a Multi-plan Offering

All of the SSSPs were operated in conjunction with another plan. In 8 cases it was operated with a TEP. In one case it was operated with an Additional Benefit Share Plan.

After Tax Employee Contribution Plan (ATECP)

Shares Rights or Options

These plans tend to use a combination of shares and share rights. The shares are acquired with employee after tax contributions to the plan. Share rights are provided as a matching grant.

New Issues or On-market Purchases

The sources of the shares for ATECPs is not clearly reported by companies, however, GRG’s experience again indicates that there is a mixture of practices with some companies using new issues and other companies using on-market purchases.

Benefit or Salary Sacrifice

Share rights are provided as a benefit with the number related to share purchases by the employee and vesting related to service following the grant of the share rights.

Whether Alone or as Part of a Multi-plan Offering

ATECPs are offered as single stand-alone plans mainly by companies with employees in multiple overseas locations.

Shares Save Plan (SSP)

Shares Rights or Options

Plan Shares are used.

Usage

The SSP is a relatively new design for a GEEP. Accordingly, its usage will remain low until it becomes more widely understood and embraced due to its superior benefits to both employees and companies, as well as the ultimate flow-on benefits to shareholders. GRG is currently working with several ASX listed companies to implement SSPs.

New Issues or On-market Purchases

SSPs tend to use new issues of shares but on-market purchases may also be used.

Benefit or Salary Sacrifice

SSPs are based on salary sacrifice. However, if matching occurs the matching represents an additional benefit with the number related to the number of Plan Shares acquired with salary sacrifice by the employee and vesting related to service following the grant of the Matching Plan Shares.

Whether Alone or as Part of a Multi-plan Offering

SSPs are generally offered as single stand-alone plans but they can be combined with TEPs.

Comparing the Plans

In each of the GRG Remuneration Insights that provide the basic outlines of the four main types of GEEP, we have provided an example to illustrate the operation of each plan. The following table summarises the results and indicates that the SSP is the best performing plan type in terms of net benefit to participants. Note TEP is most tax effective but unfortunately it is only limited to $1,000.

Summarising the results, the SSP is the best performing plan type in terms of net benefit to participants