Employee Option Plan

The Employee Option Plan involves the issue of call options over the unissued capital of the organisation to an employee. The employee becomes entitled to exercise these options after satisfying performance hurdles.

The exercise price of the options is generally set at the shares' market price at the time the options are issued. The value of the reward is then determined by the increase in the organisation's share value over the exercise price. Should the value of the organisation's shares be less than the options' exercise price the employee receives no reward regardless of whether the performance hurdles are satisfied.

EOPs are historically an executive incentive. But, during the information technology boom from 1993 to 2003 Employee Option Plans become more common. Today the majority of information technology and biotechnological organisations provide their employees with some form of equity participation, and the majority of these are delivered through an Employee Option Plan.

The OTA Employee Option Plan is designed to comply with Income tax Assessment Act 1997 (ITAA), Subdivision 83A-C, which provides income tax deferral for the participants in the plan. The income taxation treatment of the option benefit in the hands of the employee is determined by the terms and conditions of the Employee Option Plan Rules. There are a number of requirements. Briefly, the term of income taxation deferral is determined by the requirement for a "real risk" of forfeiture clause and can in certain circumstances be followed by an escrow period for a total of seven years.

Option rewards are particularly suited to organisations that are anticipating high annual rates of growth, such as start-up organisations.

Organisations in the early stages of the business cycle utilise the Employee Option Plan as an egalitarian way of providing participation to employees, and to act as an attraction for potential employees.

The organisation will be required to consider disclosure requirements of both the Corporations Law and, if an Australian Stock Exchange listed organisation, the Stock Exchange Listing Rules.

All expenses involved in the design and establishment of the Employee Option Plan are tax deductible to the organisation. Employers who provide options to staff will be required to disclose the value of options granted to certain employees, and also be required to expense the "value" of the options granted in their profit and loss account.

The method of determining the value of the options issued to the EOP to be expensed in the organisation's profit and loss account is complex, and is outlined in Australian Accounting Standards Board Accounting Standard 2. However, in general this will involve the valuation of the options under a methodology such as the binomial method. The value is then adjusted by expectations dependent upon whether performance hurdles will be satisfied. The value is then apportioned to the period of the EOP with annual adjustments for changes in expectations.

Should you require assistance, please contact OTA.