Taking stock of employee share plans

The chance to own a stake in the firm often comes with rules like curbs on cashing out

- Tay Hong Yi

Cliffs, vesting, options... A bewildering lingo is used for stock plans designed to incentivize and reward employees by awarding them company shares or allowing them to purchase shares on favorable terms.

While stock options and grants have long been in place for executives in finance, large corporations and public companies, I had my first brush with the concept while reporting on retrenchments at technology firms two years ago. Affected workers I interviewed pondered the fate of their unvested shares upon losing their jobs.

As more sectors adopt equity compensation as part of total remuneration packages, with coverage expanded to junior employees to lure the best talent even on a shoestring, it is ever more crucial to demystify these plans for young professionals.

There are also "phantom share" incentive plans that give the employee cash payouts pegged to share performance, without granting actual shares.

Those presented with a chance to pick up company shares will need to decide how these shares figure in their wider portfolio, keep an eye on how share restrictions affect how much and how soon they can cash out, and factor in knock-on effects, especially on taxable income.

ESOPS' FABLE

Employee stock ownership plans (Esops) generally mean compensation programmes that offer employees the chance to own shares in the company, said Dr Fermin Diez, a compensation-issues researcher with more than 30 years of corporate experience.

Strictly speaking, Esops are plans that give an employee the right to buy shares at a fixed price after a specified interval called the vesting period.

However, the term has become a catch-all term for other types of share plans, Dr Diez noted.

For instance, some companies may opt for restricted share plans, where shares are granted but become accessible over time or when an individual staff member or the company reaches certain milestones.