Executive Share Plan

The Executive Share Plan long-term incentive involves the allocation of shares in the organisation to the executive, with the executive becoming entitled to the value of these shares after the fulfilment of performance hurdles. Shares can be issued or purchased "on-market" for the purposes of the Executive Share Plan.

The value of the reward to the executive is the value of the shares at the time the performance hurdles are satisfied and any escrow periods have ended. Thus, the value of the reward is the value at the time of issue plus any rise in the shares' value from the date of allocation. Should the organisation's share value be less than the value at issue, the executive will still receive a reward being the final value of the organisation's shares, subject to the fulfilment of the performance hurdles.

The Executive Share 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 share benefit in the hands of the employee is determined by the terms and conditions of the Executive Share Plan Rules. There are a number of conditions. Briefly, the term of the income taxation deferral is determined by the requirement for a "real risk" of forfeiture clause and can in circumstances be followed by an escrow period for a total of seven years.

This design is particularly suited to mature organisations that do not expect high annual growth rates.

Organisations in the later stages of the business cycle utilise the Executive Share Plan long-term incentive to provide executives with exposure to the underlying value of the share as well as any potential value from changes in the share price over the Executive Share Plan's term. Executives also generally receive the dividends associated with the Executive Share Plan shares. This feature of the Executive Share Plan reduces the incentive, found within the Executive Option Plan, for capital management that only increases the organisation's share value, e.g. restricting dividend payments.

In addition to ITAA requirements 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 should the organisation wish to issue the shares for the Executive Share Plan.

All expenses involved in the design and establishment of the Executive Share Plan are tax deductible to the organisation. The organisation will be required to disclose the value of the shares allocated to certain employees, and also to expense the "value" of the shares in their profit and loss account. A corresponding income taxation deduction may be able to be accessed in certain designs.

The method of determining the value of shares allocated to the Executive Share Plan 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 the shares' value at allocation will be adjusted for performance hurdles and apportioned over the period of the Executive Share Plan.

Should you require assistance with any aspect of an Executive Share Plan, or wish to discuss what a reasonable valuation is, please contact OTA.