Employee Share Ownership Plans: Current Practice and Regulatory Reform

Project Summary

This project, funded by the Australian Research Council (ARC), is a joint initiative of the Centre for Corporate Law, the Centre for Employment and Labour Relations Law and The Tax Group.

Employee share ownership plans (ESOPs) are important to the development of an economic culture of enterprise and innovation and the building of national wealth and savings in response to long-term demands of intergenerational equity. ESOPs require development through appropriate regulatory frameworks. This project will subject the existing regime of tax, corporate and labour law to technical and empirical scrutiny. It will produce the first comprehensive analysis of how currently legal regulation structures and constrains the use of ESOPs in Australian enterprises. It will examine the current incidence and forms of ESOPs in Australia, the diversity of objectives that such schemes serve, the extent to which current corporate, tax and labour law inhibit ESOPs, and the case for reform of the regulatory framework. This will enhance the capacity of policy makers to evaluate and identify appropriate regulatory techniques to ensure the growth of efficiency of ESOPs at the national and enterprise level.

Key parts of the project are:

1. A detailed analysis of the current use of ESOPs by focusing on issues such as how use of ESOPs varies by industry; the different types of ESOPs etc. This will entail empirical research in order to generate new data;
2. An analysis of how corporate law, labour law and taxation law impact upon the use of ESOPs;
3. Identification of the established and emerging social, economic and policy objectives of ESOPs;
4. Analysis of regulatory 'fit': that is, an examination of whether the regulation in this area provides a rational, coherent and sufficiently flexible legal framework with respect to the key social and economic objectives for ESOPs; and
5. Consideration of the case for regulatory reform.

Research Impact

In 2009, the Project's Chief Investigators Ann O'Connell and Ian Ramsay made a written submission in response to the Government's draft legislation to reform the taxation of employee share schemes.

• Reform of the Taxation of Employee Share Plans – Consultation Paper, Submission from Professor Ian Ramsay and Associate Professor Ann O’Connell, Melbourne Law School, 12 June 2009

On 17 August 2009, the Senate Economics References Committee released its report on Employee Share Schemes. The majority report called on the Government to await the result of a number of ongoing inquiries before introducing the proposed legislation. Ann O'Connell gave evidence at the Senate Committee's hearings and the work of the Project is quoted at length in the Senate report.

• Senate Economics References Committee, Report on Employee Share Schemes, 17 August 2009

An article by Ann O'Connell on the draft legislation was published on 20 August 2009 in the Australian Financial Review.

• Ann O'Connell, 'Long Hard Look Needed at Employee Share Schemes', Australian Financial Review, 20 August 2009

Research Questions

Trends in employee share ownership plans in publicly-listed companies

While we know many publicly-listed companies in Australia have broad-based employee share ownership plans, we know little about how such companies are structuring their plans. This project analysed current market trends in employee share ownership plans. The project examined how large publicly-listed companies in Australia structure their broad-based ESOPs. This analysis will include, for example, what percentage of equity is made available to employees through ESOPs; the type of security issued; whether a trust is used to administer the plan; rights attached to the equity issued; source of finance for the ESOP and eligibility requirements. It will also seek to ascertain whether companies are structuring their ESOPs so as to access the concessional taxation treatment available under Division 13A of the Income Tax Assessment Act 1936 (Cth).

This project involves administering a survey to all companies listed on the Australian Securities Exchange (ASX). The purpose of the survey is to obtain detailed data on the types of companies with broad-based employee share ownership plans, and their objectives and practice in relation to these plans. The survey also seeks to obtain company views on the adequacy of the current regulatory framework in taxation and corporations law.

Employee share ownership plans: why do employees participate?

The primary aim of this research is to understand why employees participate or decline to participate in employee share ownership plans. Research on ESOPs to date has tended to focus on associated organisational outcomes, with some research pointing to a range of positive outcomes (eg. higher job satisfaction, organisational commitment and improved organisational performance). The benefits of ESOPs are more likely to be realised when a significant proportion of employees acquire shares under the ESOP. However, very little is known about employee motivations for share acquisition though an ESOP. Why do employees take up shares in their own organisations when it is possible to buy shares in other, perhaps better performing, organisations through the share market? Do employees take up shares for financial returns or because of a desire to participate more in the decision-making processes of the organisation? Based on the data collected through interviews with HR managers and trade union representatives in Australian companies, we developed a survey which will investigate why employees take up shares in their organisation. The survey will be administered to employees in companies that offer broad-based employee share schemes.

Employee share ownership plans in small and medium-sized enterprises

Small and medium-sized enterprises (SMEs) are much less likely to have broad-based employee share ownership plans than their larger counterparts. The lack of diffusion of employee share schemes in SMEs presents a formidable obstacle to government attempts to promote the take-up of employee share ownership plans in Australia. It also means that the majority of employees in Australia do not have the opportunity to own shares in the companies for which they work. It is widely recognised that employee share ownership in the SME sector is qualitatively different from that in larger enterprises and that the current regulatory regime may be ill-suited to serving the objectives for which ESOPs are introduced in SMEs. This research will investigate current objectives of SME owners in implementing ESOPs; how employee share ownership in SMEs is being implemented and structured; and how the current regulatory regime structures and constrains the use of ESOPs in this sector. This project will also examine how employee share ownership in SMEs is regulated in other countries, such as the United Kingdom and the United States.

Publications - Book

I Landau, A O'Connell and I Ramsay, The Theory, Policy and Practice of Employee Share Ownership Plans in Australia, Melbourne University Publishing, 2013.

Publications - Research Reports

A O'Connell, Employee Share Ownership Plans - A Comparative Report (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, September 2011).

M Brown, R Minson, A O'Connell and I Ramsay, Why do employees participate in employee share ownership plans? (Employee Survey Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, June 2011).

A O'Connell, Employee Share Ownership Plans in Australia: Cross Border Issues Arising from Employee Share Ownership Plans (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, November 2010).

I Landau, A O'Connell and I Ramsay, Employee Share Schemes: Regulation and Policy (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, May 2010).

I Landau, R Mitchell, A O'Connell, I Ramsay and S Marshall, Broad-Based Employee Share Ownership in Australian Listed Companies: Survey Report (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, April 2009).

A O'Connell, 'Employee Share Ownership in Unlisted Entities: Objectives, Current Practices and Regulatory Reform' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, December 2008).

M Brown, I Landau, R Mitchell, A O'Connell and I Ramsay, 'Why Do Employees Participate in Employee Share Plans? A Conceptual Framework' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, February 2008).

I Landau, R Mitchell, A O'Connell and I Ramsay, 'An Overview of Existing Data on Employee Share Ownership in Australia' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, March 2007).

I Landau, R Mitchell, A O'Connell and I Ramsay, 'Employee Share Ownership: A Review of the Literature' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, March 2007).

I Landau and I Ramsay, 'Employee Share Ownership Plans in Australia: The Corporate Law Framework' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, March 2007).

A O'Connell, 'Employee Share Ownership Plans in Australia: The Taxation Law Framework' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, March 2007).

The following research papers on employee share ownership have been produced as a result of associated research projects at the Faculty of Law, University of Melbourne:

A Barnes, T Josev, J Lenne, S Marshall, R Mitchell, I Ramsay and C Rider, 'Employee Share Ownership Schemes: Two Case Studies' (Research Report, Corporate Governance and Workplace Partnerships project, Centre for Corporate Law and Securities Regulation and Centre for Employment and Labour Relations Law, University of Melbourne, March 2006).

C Rider, L Hong, A O'Connell and M Stewart, Taxation Problems in the Commercialisation of Intellectual Property(Report No 01/06, Intellectual Property Research Institute of Australia, University of Melbourne, 2006).

J Lenne, R Mitchell and I Ramsay, 'Employee Share Ownership Schemes in Australia: A Survey of Key Issues and Themes' (Research Report, Corporate Governance and Workplace Partnerships project, Centre for Corporate Law and Securities Regulation and Centre for Employment and Labour Relations Law, University of Melbourne, May 2005).

C Rider, 'Sellers of Labour or Investors of Intellectual Capital? Conceptual Problems in the Taxation of Employee Share Ownership in IP Spin-off Companies' (Working Paper No 19/ 05, Intellectual Property Research Institute of Australia, University of Melbourne, October 2005).

Publications - Journal Articles

M Brown, R Minson, A O'Connell and I Ramsay, "Employee Participation in Employee Share Ownership Plans: The Law, Company Objectives and Employee Motives" (2012) 25 Australian Journal of Labour Law 1-22.

A O'Connell, Cross-border issues arising from employee share ownership plans (2010) 39 Australian Tax Review 187-204

I Landau, I, A O'Connell and I Ramsay, Employee Share Schemes-Regulation & Policy (2010) 25(3) Australian Tax Forum 459-476

I Landau, R Mitchell, A O'Connell, I Ramsay and S Marshall "Broad-Based Employee Share Ownership in Australian Listed Companies: An Empirical Analysis" (2009) 37 Australian Business Law Review 412-433

A O'Connell, "Employee Share Ownership in Unlisted Entities: Objectives, Current Practices and Regulatory Reform" (2009) 37 Australian Business Law Review 211-238

M Brown, I Landau, R Mitchell, A O'Connell and I Ramsay, "Why do Employees Participate in Employee Share Plans? A Conceptual Framework" (2008) 18 Labour & Industry 45-72

A O'Connell, Employee Share Ownership Plans in Australia - The Taxation Law Framework (January 2008) 3 Journal of Australasian Tax Teachers Association 36-60

I Landau, R Mitchell, A O'Connell and I Ramsay, "Employee Share Ownership in Australia: Theory, Evidence, Current Practice and Regulation" (2007) 25 UCLA Pacific Basin Law Journal 25-132

A Barnes, T Josev, J Lenne, S Marshall, R Mitchell, I Ramsay and C Rider, "Employee Share Ownership Schemes: Evaluating the Role of Tax and Other Factors Using Two Case Studies" (2007) 35 Australian Business Law Review 73-92

J Lenne, R Mitchell and I Ramsay, "Employee Share Ownership Schemes in Australia: A Survey of Key Issues and Themes" (2006) 14 International Journal of Employment Studies 1-34

Events

Employee Share Ownership Plans in Australia: Cross Border Issues Arising from Employee Share Ownership Plans
On 5 November 2010 a workshop was held at Melbourne Law School. Speakers at the workshop included Professor Joseph Blasi from Rutgers University, New Jersey who spoke on ESOPs in the US and Professor Andrew Pendleton from York University who spoke on ESOPs in the UK. Other speakers included Professor Ian Ramsay and Associate Professor Ann O'Connell from the Melbourne Law School and Andrew Clements (Mallesons), Sarah Bernhardt (Allens Arthur Robinson) and Martin Morrow (KPMG).

Employee share ownership plans in small and medium-sized enterprises

On 2 April 2008, the Employee Share Ownership Project hosted a day-long workshop on the regulation of employee share ownership in SMEs. Attended by legal practitioners, regulators and academic researchers, the workshop discussed objectives for, and current practice in, broad-based employee share ownership in Australian SMEs. Participants identified and discussed a number of regulatory obstacles to broad-based employee share ownership in this sector, emanating from corporations and taxation law.