Executive Share Plan (with finance)

The Executive Share Plan (with finance) (Share Plan WF) long-term incentive involves the organisation providing the offer of an interest-free loan to the executive to enable the executive to purchase equity in the organisation. The loan is limited in recourse to the value of the equity in the organisation purchased. After the satisfaction of performance hurdles, and after repaying the loan, the executive becomes entitled to any additional value created within the plan. Shares can be issued or purchased "on-market" for the purposes of the Share Plan WF (when issued, shares would be issued at the then "current market price").

The value of the reward to the executive is determined by the increase in value of the organisation's shares over the purchase price of the organisation's shares. Should the organisation's share value be less than the loan's value the executive receives no reward, regardless of whether the performance hurdles are satisfied.

There is no restriction on the performance hurdles that can be applied to the Share Plan WF.

This design parallels the Executive Option Plan, with rewards only available through increases in share price over the purchase price/exercise price. The main difference between the Share Plan WF and Executive Option Plan is that, under the Share Plan WF, the participant also receives any dividends. Thus the Share Plan WF is particularly suited to organisations in the middle of the business cycle, i.e. organisations that pay regular dividends, but still retain a position in the market that accesses high potential growth.

Owen Thomas & Associates Pty Limited (OTA) understands that the Share Plan WF should benefit from fringe benefits taxation concessions. In general, the participant receives any dividends as income each financial year, and pays income taxation each year at their marginal taxation rate. OTA understands that any associated franking credits would also pass to the participant.

Should the performance hurdles be satisfied and the value of the shares appreciates, the participant can settle the loan, sell the shares and receive the reward. This would be treated as a capital gain to the participant.

Should the performance hurdles not be satisfied, or the shares not appreciate in value, the participant would redeliver the shares and any associated corporate actions to the company as full and final satisfaction of any outstanding loan and the participant will not be entitled to any further benefit in respect of those securities..

Corporations Law and Australian Stock Exchange listing rules requirements need to be satisfied to implement this structure, and OTA does not recommend this form of incentive outside the executive forum.

All expenses from the establishment of the Share Plan WF are tax deductible to the organisation. The method of determining the value of the incentive to be expensed in the organisation's profit and loss account is complex and is outlined in Australian Accounting Standards Board Accounting Standard 2. OTA can assist with the valuations of long term incentives (see Valuation and Costing of Remuneration Strategies).

Should you require any assistance with, or wish to discuss the Share Plan WF further, please contact OTA.