Facebooks Equity Gaffe
Published in the Leading Company - October 2012 by Kath Walters
Dale Gillham, executive director of Wealth Within, says he would advise against employees taking share options, other than those in the highest executive roles, such as chief executive, or chief financial officer.
“I would say get the money in the hand, because share options or equity is really high-risk for most of the companies issuing shares. Unless you are talking about a big listed entity, in the top 100, you are better off getting cash in your hand.
The equity will come with conditions, such as that you can’t sell it for two years, or you can’t leave. They can invest their cash in things that are less risky.”
Tax is another problem for employee share schemes. The tax office determined some years ago that employees need to pay tax on shares when they receive them, if they are given for free. Tax can only be deferred to a future date in very rate circumstances. These rules add to the disincentive.
“If you issue options and they are in the money, so you are paying less than market value, so you might think I can afford to pay a bit of tax,” says Cummings.
“But if I have paid $10,000 in tax and then share price goes down – they are out of the money – and that tracks along for three years until the options have to be exercised, I can’t get the tax back.
Those options expire worthless, and I am stuck having paid the tax.”
Staff can blame management for putting them in the scheme, further eroding their leadership authority. Gillham says he has considered the idea of an employee share plan for his own managers, but decided against it. “For start-ups it is great, but for companies that are more stable it is harder.
Employees prefer what they can get now, rather than what they can get in the future.” Cummings says: “For a handful of key executives, it is the right thing to do because you are dealing with commercially astute people who can get their own advice.”
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