An employee share scheme (ESS) is a form of remuneration for an employee which is, in most cases and subject to receiving and giving advice on the necessary tax implications, exempt from income tax. The shares are purchased by the employer or entity designated as trustee — usually a Corporate Nominee — who holds them on your behalf until you leave employment with the company, at which point they are distributed to you. Employees may choose to purchase their shares at market value if they leave before five years, although this will incur capital gains tax liability. If no such option is given, then it is likely that the fair market value of the company’s shares held under your ESS will likely increase when you leave employment.

ESS can include free shares, RSUs, phantom shares, or any other device which follows the relevant rules. It is not uncommon for ESS to be structured as an RSU where you are given a choice to purchase your options at market value if you leave within five years.

Other benefits that may come with participating in an ESS are discounts on Company products/services, longer maternity/paternity leave, flexible work hours, etc. The benefits will vary depending upon the company’s policy and may simply take the form of additional shares. You should read all documentation relating to these schemes carefully before making any decisions so that you know what to expect should you leave employment with the company.

Risks Associated With an Employee Share Schemes

The main risk with participating in an ESS is that it can be difficult to sell your shares for the right price if you need to. Shares under an ESS are often illiquid and, therefore, will tend to have a lower value than those on the open market (the Bid-Offer Spread). The company would allow employees to cash out early because they understand that if you require money, then selling shares below market value may not be possible. So, unless the employer gives an option, make sure you fully consider this before joining an ESS. It could result in significant negative financial consequences should you need to exit employment with the company quickly.

In conclusion, ESS can be a great way to own shares in the company you work for and decide when to sell these. But it is not without its risks, and you should bear this in mind before signing up for an ESS.