Equity-based Compensation: The Basics for Australian Expats – ESPPs

Introduction

The United States and the broader Asia-Pacific (APAC) region acts as a beacon of opportunity for Australian Expats looking to accelerate their careers in industries such as Computer Software, Information Technology, Mining, Law Practice, and many more. With this opportunity, Australian Expats are commonly presented with unique compensation packages that include equity in the employer company, supplementing their ordinary wage income.

Some common examples of equity-based compensation include:

-        Restricted Stock Units (RSU)

-        Stock Options

-        Employee Stock Purchase Plans (ESPP)

This 3-part Article series will look to discuss the unique aspects of receiving different types of equity-based compensation and explain how Australian Expats can best manage them from a sound financial planning standpoint.

What are Employee Stock Purchase Plans (ESPPs)?

Employee Stock Purchase Plans (ESPPs) are another popular form of equity-based compensation offered by employers. This type of equity compensation is probably the most well understood by Australians due to its prevalence there (referred to as Employee Share Schemes ESS). The Plan will allow the employee to purchase shares (or in some instances options) in the company at a discounted price to the current market price. Generally, the employee will contribute a portion of their salary each pay cycle (deducted by payroll), and these funds are earmarked to purchase stock in the company at regular intervals (usually on a quarterly basis).

Some ESPPs will allow you to purchase shares at a discount every quarter, which can then be immediately sold on the secondary market at a profit. Others plans will provide you with matching shares, i.e., for every share that you buy, the company will match this on a 1-for-1 basis. In the latter instance, the matching shares are usually subject to a holding period where you would need to retain your shares and stay with the company over a holding period before you can sell your shares on the secondary market. The taxation treatment will vary depending on your company’s specific ESPP and the tax concessions available in your country of tax residency.

Financial Planning Risks and Opportunities

A reiteration from the discussion on RSUs and Stock Options remains true with ESPPs, diversification of assets is key. Where an employee is accumulating such significant positions of their total wealth in one stock, they should consider having a plan in effect to sell down part of this holding in a systematic way to reduce the concentration risk associated with holding only one stock. The timing of the sale of your shares can be important. Employees should familiarize themselves with their company’s specific ESPP as each plan will be quite different.

Conclusion

In summary, while being afforded such compensation can be advantageous, and even lucrative at times, Australian Expats should take due care to manage this supplementary income from a tax planning and long-term risk mitigation outlook, especially in the face of heightened share market volatility. Partnering with a Financial adviser can help put you on a path to making the best use of this income to achieve your financial goals.

General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.