Executive share schemes (ESS) can be a valuable part of the compensation package for professionals and executives in technology, healthcare, biotechnology, and pharmaceuticals. These schemes offer significant financial incentives but also have substantial tax implications that must be carefully managed.

Many professionals run into common ESS pitfalls — holding too much employer stock and taking on unnecessary risk, selling without considering tax consequences, or simply not having a plan for what to do with their shares.

A well-structured approach to ESS can help professionals make informed decisions, reduce risk, manage tax obligations, and ensure their shareholdings work in their best interests. In this guide, we’ll break down the key considerations, common mistakes, and strategies to help you get the most out of your ESS.

Understanding ESS: What It Means for High-Income Professionals

ESS participants typically receive shares in one of three ways:

• At a discount, reducing the upfront cost of ownership.
• As a performance-based reward, where shares are granted based on achieving certain company or individual targets.
• Through an option plan, where employees have the right to purchase shares at a predetermined price once certain conditions are met.

Key Elements of an ESS

• Vesting periods – The timeframe before employees fully own their shares. Shares are typically released in stages over a set period, ensuring employees remain aligned with the company’s performance.
• Performance hurdles – Targets, such as revenue growth or share price performance, that must be met before shares vest.
• Tax implications – The tax treatment of ESS varies depending on when and how shares are accessed, making timing a critical factor in financial planning.

Managing Vested Shares: Key Considerations and Strategies

Once shares vest, executives have three primary options—retaining shares, selling all shares, or selling a portion to cover tax liabilities. Each approach has financial and tax implications that should be carefully considered.

1. Retaining Vested Shares

Holding vested shares can provide long-term financial benefits through potential capital growth and dividends. However, this strategy requires careful planning, as tax treatment varies depending on how the shares are held—whether in your personal name, a spouse’s name, superannuation, or a family trust.

Key considerations:

• Capital gains tax (CGT) implications – Future tax liabilities will arise when shares are eventually sold.
• Market risk – If the company underperforms, the value of the shares could decline, leaving you with an unfunded tax liability.
• Concentration risk – Holding too much of your wealth in employer stock reduces portfolio diversification, increasing exposure to company-specific risks.

While retaining shares can align with broader wealth-building strategies, it is essential to assess risk versus reward and explore alternative investment opportunities.

2. Selling All Vested Shares

Selling all vested shares immediately can be a practical strategy for those looking to reduce concentration risk, free up liquidity, or reinvest in a diversified portfolio. This approach allows executives to use the proceeds for debt repayment, superannuation contributions, or other investment opportunities.

Timing is crucial:

• ATO income reporting – Selling shares within 30 days of vesting can impact how income is reported and taxed.
• Higher tax bracket risk – A large one-time sale may push income into a higher tax bracket, increasing the tax burden.
• Immediate financial flexibility – Selling provides cash flow certainty and removes exposure to employer stock fluctuations.

For professionals concerned about overexposure to employer stock, this strategy reduces risk and ensures liquidity, but tax implications must be carefully managed.

3. Selling Enough Shares to Cover Tax Liabilities

As ESS income is typically taxed at the top marginal rate of 47%, many executives choose to sell just enough shares—around 47% of their vested holdings—to meet tax obligations.

Key benefits:

• Avoiding tax shortfalls – Proceeds can be held in a high-interest bank account or used to offset a mortgage, ensuring funds are available when tax is due.
• No tax withholding by ESS administrators – Unlike salary income, ESS administrators do not withhold tax, meaning executives must proactively manage their tax liabilities.
• Protecting against share price declines – Selling a portion of shares ensures that if the stock price drops before tax is due, the necessary funds are already set aside.

This strategy balances liquidity and tax efficiency, allowing executives to maintain some exposure to employer stock while mitigating financial risk.

The Value of Professional Financial Planning for ESS Holders

Making the right decisions around Executive Share Schemes (ESS) requires more than just understanding tax implications or choosing when to sell. 

One of the most significant concerns is concentration risk—holding too much of your portfolio in a single stock. If the company underperforms, this can have serious financial consequences. A well-diversified investment strategy ensures long-term stability and helps avoid overexposure to employer shares.

Tax planning is another key consideration. Timing the sale of vested shares can have a major impact on capital gains tax (CGT). A structured approach, such as selling shares incrementally over multiple financial years or waiting until retirement when income is lower, can significantly reduce tax obligations. 

There’s also the emotional aspect of holding employer shares. Many executives develop a strong attachment to their company stock, often assuming continued growth. Professional financial advice can provide an objective view—helping clients evaluate their stock holdings in the context of their overall financial plan and long-term wealth goals.

Take Control of Your ESS Strategy

ESS can be a powerful wealth-building tool, but without the right financial strategy, it can also introduce unnecessary risk and tax exposure. Professional advice ensures that your ESS decisions align with your broader investment plan, risk tolerance, and long-term financial objectives.

At Lighthouse Financial Group, we help executives and professionals navigate ESS complexities, tax planning, and diversification strategies to ensure they make the most of their shares. If you’re holding a significant portion of your wealth in company stock and want to make informed, strategic decisions, contact us today for a consultation.

Lighthouse Financial Group Pty Ltd, Authorised Representative 000287794 ABN 221 13 759 952 is a corporate authorised representative of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357 306. The information contained within this article does not consider your personal circumstances and is of a general nature only. You should not act on it without first obtaining professional financial advice specific to your circumstances.