EPS Insight Broad-Based Employee Share Plans in Australiaemployeeownership.com.au/eoa/wp-content/uploads/... · Employee Share Plans in Australia Equity Plan Solutions August 2017

Part of Link Group | Corporate Markets

EPS Insight Broad-Based Employee Share Plans in AustraliaEquity Plan Solutions August 2017

In this edition 4

Key Information 5

Tax Exempt Gift Plans 6

Tax Exempt Contribution Plans 7

Plan Acceptance Rates 8

Acceptance Rates – Findings 10

Other Broad-Based Share Plans 12

Post Release Activity 13

Telstra in the Spotlight 14

Employee ownership increases company value and engagement 16

Need to up the take up? 18

Contents

Welcome to our review of broad-based employee share plans in Australia. Over the last year Link has seen increased interest in broad-based share plans with many companies requesting market trends and data.

This review builds on that research and brings new insight into the operation of the broad-based plan.

In this edition

This report contains insights on plan trends, design, offers, post vesting activity and employee engagement, and covers all the tax exempt and salary sacrifice plans offered by Link clients in 2016.

Additionally, we talk to Telstra regarding its ‘TESP’ to gain a better understanding of how they successfully managed their offer to 35,000 employees.

Throughout this report we refer to Tax Exempt Plans and $5,000 Share Purchase Plans, being the most popular broad-based share plans in Australia:

Tax Exempt Plans: are those plans meeting the requirements of section 83A-35 of the Income Tax Assessment Act 1997 (Cth) (the Act), and can be divided into ‘opt in’ (where employees must explicitly accept an offer of shares) and ‘opt out’ (where employees are given shares and can choose not to accept them). Tax exempt plans can also be offered as a ‘gift’ (for nil consideration) or on a salary sacrifice basis

$5,000 share purchase plans: are plans that meet the requirements of 83A-105(4) of the Act. These plans are typically offered on an opt-in basis and employees are invited to purchase shares at full value using pre-tax funds.

Key Takeaways

4%of participants sold their shares within 30 days

of the release date

68% of employees are still in the plan at the 3 year

restriction period

75% of our ASX200

companies have a tax exempt share plan

We hope you enjoy this edition and if you would like further information, please contact your Client Relationship Manager.

Link’s EPS team experienced a busy 2016, managing client exempt share plan offers to over 300,000 participants

4 • Link Market Services EPS Insight Broad based Employee Share Plans in Australia

Key Information

Broad-based plan type

75% of Link clients (within the ASX200) offer a broad-based plan, with tax exempt plans being more popular than $5,000 salary sacrifice plans:

Plan offering by market capitalisation

Broad-based plans are most popular amongst ASX50 clients.

Types of Plans offered by Companies

Plan offering by market capitalisation

9%ASX 200-300

29%ASX50-100

35%ASX50

27%ASX100-200

8%Other

52%Gift

40%Contribution

Plan offering by Industry

Over 40% of the companies covered by this report are in the financial sector.

Industrials

Utilities

Telecommunication Services

Materials

Information Technology

Health Care

Financials

Consumer Staples

Consumer Discretionary

0 10 20 30 40 50

6%

4%

17 %

10%

10%

41%

4%

4%

4%

Link Market Services EPS Insight Broad based Employee Share Plans in Australia • 5

Offer election types

Tax Exempt Gift Plans

Companies that offer a tax exempt gift plan must decide whether participants physically accept the offer.

The answer to this is mainly around whether you have employees make the conscious decision to join the plan or you want to ease the administration burden. The data shows companies tend slightly toward opt-out offers.

6%Opt In & Out

44%Opt In

50%Opt Out

Key findings

50%of companies require

employees to be employed for 12 months

or more to receive the offer.

64%of companies purchase shares on market, with

others issuing new shares or recycling unallocated trust

shares.

10%of companies have a

gateway hurdle that must be met before the plan

is offered.

46%of companies use a Trust

to hold the shares on behalf of participants.


Tax Exempt Contribution Plans

All companies offering a tax exempt contribution plan had an annual offer and asked participants to join the plan. One company asked new participants to accept the offer and automatically rolled over participation for existing plan participants. This makes sense, given companies are asking participants to forego salary to purchase equity in the company.

60% of companies use a Trust to hold the shares on behalf of participants

92% of companies purchase shares on market for the Plan – this avoids dilution for existing shareholders

Companies that purchase plan shares once per plan year generally make deductions over a six-month period. These companies often find it problematic to manage participants on extended leave as they are unable to deduct the contributions from salaries.

Most companies do not offer any further discounts or company matching element to the plan:

Only one company offers a 10% discount

Only one company provides a 70/30 matching component to the plan

Purchase frequency:

38%purchase annually

12%purchase biannually

12%purchase quarterly

38%purchase monthly


Plan Acceptance Rates

Plan Type Comparison

Gift Plans Opt-InPlan Take-up Rate

Average Minimum Median Maximum

91% 99

%

27%

73%

5%

99%

93%

25%

99%

96%

57%

100%

Company 1

Company 2

Company 3

Company 4

Company 5

Company 6

Company 7

Company 8

…out of 1,005

…out of 1,286

…out of 1,336

…out of 1,641

…out of 2,511

…out of 5,239

…out of 11,084

…out of 29,098

93.3%

93.1%

93.6%

95.1%

96.4%

95.7%

95.1%

96.4%

95.7%

86%

73.4%

93.6%

93.1%

93.3%

■ Gift – Opt In ■ Gift – Opt Out ■ Contribution

Companies with a Gift opt in plan and a take up rate higher than 93% had offered the plan for

more than 3 years.


Contribution PlansPlan Take-up Rate

Company 1

Company 2

Company 3

Company 4

Company 5

Company 6

Company 7

Company 8

…out of 526

…out of 588

…out of 1,363

…out of 1,855

…out of 3,998

…out of 5,098

…out of 5,219

…out of 125,648

55%

57%

26%

25%

13%

8%

7%

5%

Month in which offers are madeShare plan offers are run throughout the year but September is the most popular month. Typically offers run for 3 weeks:

0

5

10

15

20

25

30

Janu

ary

Febr

uary

Mar

ch

April

May

June July

Augu

st

Sept

embe

r

Oct

ober

Nove

mbe

r

Dece

mbe

r


Acceptance Rates – Findings

Our companies are always looking to understand how they can increase the overall acceptance rates for their share plans. To assist with answering this question we looked at common enquiries and feedback from your employees about their share plans.

Link received almost 50,000 emails and 58,000 telephone calls from plan participants in 2016.

Why don’t employees’ accept the offer?Reasons may include:

• Lack of understanding

• Spread of investment risk (contribution plans)

• Earning above $180,000

• Conflict of interest

• Personal and cultural reasons

Reviewing the employee communications for an issuer highlighted that employees did not understand the nil-consideration aspect of the Plan. Many questions related to payment or how the Plan would impact employees’ personal tax position.

By examining data for participants that had not accepted a gift plan for the last six years, we discovered that 60% of these participants had consistently not accepted the offer.

Companies with a simple communication strategy that actively promote the plan throughout the year have the best acceptance rate. Some examples of how they do this:

• Reminder emails sent throughout the offer period

• Business unit managers provided with offer acceptance progress reports

• Managers and/or HR contacting employees yet to accept the offer

• Ensuring that employees on extended leave who are eligible to participate are given the best opportunity to receive the offer and accept

• Staff briefing sessions and management training sessions prior to offer and during offer season

• Clear website information or personalised videos

• Clear advice or make advice available to employees

Actual questions received from employees during the same offer period for a tax exempt gift plan:

Q1: Just wanting to know, how are shares paid for? Is this deducted as a lump sum from wages, or on a monthly basis, or do we pay upfront to an account? Just wanting to know payment methods available and on what frequency.

Q2: Just double-checking… “At no financial cost” means [Company] is giving away $1,000 worth of shares to me for free*, right? (*excepting tax implications, of course)

Q3: I was wondering if you could assist me in my query concerning the invitation. Is this giving away $1000 worth of shares free where we just need to register to accept the offer? or is the invitation just an offer for the opportunity to purchase up to $1000 worth of shares?


Other Broad-Based Share Plans

$5,000 share purchase plan

We did not see a significant number of Australian clients offering share purchase plans. However they can provide a useful way for employees to purchase additional company shares. Interestingly, it is suggested that discount plans are proving popular in North America, while European companies commonly offer both matching and discount plans.

Of the 8 companies Link manages these plans for:

Company MatchingAverage participation

rate (take up) Purchase frequency

Company A No 12% Quarterly

Company B 1 share is matched with 1 right 40% Quarterly

Company CCompany matches up to 10% of purchased shares 25% Quarterly

Company E No Monthly

Company F No 10% Monthly

Company G No 7% Monthly

Company H No 10% Monthly

Company I No 1% During trading windows

Share Rights Gift Plan

• Two clients offer a broad-based share rights plan where Rights are granted with a 3 year vesting period. One client attaches a TSR performance condition to the Plan.

• The average take up rate is 96%.


Post Release Activity

Where the previous sections discuss the design and offer aspects of general share plans, here we examine what happens at the end of the three year restriction period.

By looking at grants made in 2013 and comparing the share price to the end of the restriction period we found:

• The average share price growth was 5.91%.

• The maximum was 58.93%

• The minimum was -50.00%

Share price growth over the restriction period

We found that at the time of release, an average 68% of participants were still in the plan, having not ceased employment.

On average 3.96% of participants sold shares within 30 days of release via our Investor Centre.

$0

$200

$400

$600

$800

$1000

$1200

$1400

$1600

Mat

erial

1

Mat

erial

2

Mat

erial

3

Indu

stria

l

Cons

umer

Disc

1

Cons

umer

Diss

2

Cons

umer

Disc

3

Cons

umer

Sta

ple

Fina

ncial

1

Fina

ncial

2

Fina

ncial

3

Fina

ncial

4

Fina

ncial

5 IT

Telec

om

Utilit

ies 1

Utilit

ies 2

Real

Esta

te 1

Real

Esta

te 2

0.2% 5.

7%

-5.3

%

20.8

%

-7.1

%

58.9

%

30.6

%

-1.2

%

-6.0

% 1.7%

53.6

%

-2.3

%

41.7

%

-1.7

%

-4.6

%

-3.9

%

28.9

%

13.4

%

-50.

0%

■ $ Value at Release – $ Value at Grant


Telstra in the Spotlight

We are frequently asked how Telstra does it. So we spoke with David Richardson, Head of Executive Remuneration and asked him just that.

How long has the TESP been in operation?The current plan design was introduced in 2012, offering 100 free shares to eligible employees providing they meet the employment eligibility criteria. The shares are restricted for 3 years unless you cease employment prior to that date, in which case they are released at that time and available for you to sell/transfer.

The plan has consistently been offered to in excess of 26,000 employees every year since 2012 on an opt-in basis, with a take up rate in 2012 of around 76%, it has improved considerably to 2017 where the take up rate was 93.7%, impressive numbers for a plan where the employees need to make a conscious decision to accept the offer.

Why is the plan offered by Telstra?The plan has its origins in the businesses’ desire to help employees feel like part owners of the company. Although it is widely acknowledged that the value of 100 Telstra shares may not be a material value relative to most employees’ remuneration, it is a symbolic way of creating that relationship.

Why the plan is on an opt-in basis, as opposed to opt-out?We have explored opt out models and may do so again. Prior management felt that the onus should be on the employee to “accept” the shares on offer. Opt out models do have their attractions including reducing the need to follow up on non-acceptance rates so we may raise this at some stage in the future for business approval.

Is it just Australian based employees?No, the plan is also offered to employees based internationally, covering employees from Telstra and subsidiaries across 16 countries. Interestingly, the plan remains the same across all different countries, 100 free shares, which means in some countries such as The Philippines, Taiwan, Thailand etc. the value of 100 shares can be a very significant amount!

How do employees value the plan? (This may be an answer from a personal point of view as a participant yourself)I think quite highly. Although the value of 100 shares is not great, from the reactions we get for employees who don’t quite qualify because of early tenure in Telstra, their feedback is that they are looking forward to when they can participate after their qualification period. For those employees who have been in multiple plans, say over 5 years, the cumulative value of dividend payments is an attraction.

How do they effectively engage with employees throughout the offer period – what is involved?As well as regular email broadcast reminders following the initial email invitation, as the offer period comes closer to closing time, contact will be made directly with managers who are responsible for employees yet to accept to attempt to alert them to the offer if they have not yet accepted.

What communication methods do they use?We communicate almost exclusively via email, though Telstra have their own internal social media style page where employees can communicate and ask questions regarding the plan and acceptance etc.

Were there any improvements made this year regarding the offer, employee engagement etc. to encourage participants to join or stay in the plan?The plan has remained largely the same since it changed from a rights plan in 2002.


Employee ownership increases company value and engagement

Research by Employee Ownership Australia and New Zealand (EOA) – an industry employee share scheme association - shows that companies with a strong employee ownership culture command a 17% share price premium over their publicly listed peers.

The EOA arrived at this conclusion via their Employee Ownership Index (Index). The Index consists of ASX 200 companies with at least 30% of their employees participating in an employee share plan, weighted by market capitalisation. Over the last 5.5 years the Index companies increased their share price by 40%, compared to just 23% for the broader ASX 200.

The research also showed that Index constituents are twice as likely to show evidence of equal opportunity systems, and outperform or match the ASX 200 in 3 out of 5 sustainability factors. This could indicate a strong link between companies offering employee share plans and having an active and engaged workforce.

OutperformTheir Peers

The results showed a strong correlation between a broad-based EO and stronger share price performance as well as positive rankings under CAER’s ESG factors.

Share Price Performance over 5½ Years

Monthly Outperformance

CAER Environment and Social outcomes

Visit us at www.employeeownership.com.au

ASX200

$0.4B - $126B$0.38B - $136B

Consistent outperfomance of the ASX 200

basis points higher

of EOI companies outperform month on month54%

Twice as likely to have clear evidence of Equal Opportuniy

EOI Companies also outperformed in

Health and Safety

Training and development practices

Job Security

outof

the

Proven Productivity, Sustainability and Diversity Outcomes

Source : CAER research and EOI index results produced from Commsec data

Companies with Employee Ownership (EO)

The Australian Employee Ownership Index (EOI) 2016

EOI Companies

All Sectors

Have EO for all employees

30% of employees participate

Market Cap


OutperformTheir Peers

The results showed a strong correlation between a broad-based EO and stronger share price performance as well as positive rankings under CAER’s ESG factors.

Share Price Performance over 5½ Years

Monthly Outperformance

CAER Environment and Social outcomes

Visit us at www.employeeownership.com.au

ASX200

$0.4B - $126B$0.38B - $136B

Consistent outperfomance of the ASX 200

basis points higher

of EOI companies outperform month on month54%

Twice as likely to have clear evidence of Equal Opportuniy

EOI Companies also outperformed in

Health and Safety

Training and development practices

Job Security

outof

the

Proven Productivity, Sustainability and Diversity Outcomes

Source : CAER research and EOI index results produced from Commsec data

Companies with Employee Ownership (EO)

The Australian Employee Ownership Index (EOI) 2016

EOI Companies

All Sectors

Have EO for all employees

30% of employees participate

Market Cap

17


Need to up the take up?

Call in the expertsLink’s marketing team are experts in employee engagement communications across share plans and superannuation. They can develop marketing strategies, internal communications, and simple financially literate communications.

Review your communicationsDevelop simple, clear and concise communications to ensure employees understand what is being offered and the benefit of the Plan.

Move into the digital ageCompanies have seen a lot of success with plan specific websites hosting plan information.

For advice or assistance with any of the above – Link is on hand to assist with your Plan communications.

Need to up the take up?

Personalise itWoolworths won best Plan Communications at the Employee Ownership Australia awards for their use of personalised web videos. The videos use the employee’s actual name, award entitlement and retail business or group branding for the communications.

Engage the managersEnsure managers in the Company understand the Plan and promote it to their staff. Manager engagement is a key determinant of involvement.

Remember the rest of the yearFor total engagement ensure the Plan is promoted throughout the year and not just during the offer period.

For advice or assistance with any of the above – Link is on hand to assist with your Plan communications.

Link Group

Level 12, 680 George Street

Sydney NSW 2000, Australia

linkgroup.com

Link Administration Holdings Ltd

ABN 27 120 964 098 LK 1349.7 08/17 ISS1

Documents

EPS Insight Broad-Based Employee Share Plans in Australiaemployeeownership.com.au/eoa/wp-content/uploads/... · Employee Share Plans in Australia Equity Plan Solutions August 2017