Retaining and rewarding key employees is an issue many employers will face at certain stages of their business’ cycle.

Employee share schemes

If implemented well, employee share schemes (ESS) or other incentive plans can help align employees’ goals with that of the business, and ultimately improve performance and the bottom line.

ESS gives your employee real rights so you are no longer in an employer-employee relationship, you are now dealing with a co-shareholder relationship which can trigger:

• Corporations Law issues;
• rights of common law; or
• contract agreement issues.

It can be very difficult and costly to unwind ESS arrangements once implemented, so it is important to ensure an ESS is right for your business before implementation.  In doing so you should consider why you are creating the arrangement, what you are trying to achieve, and what you are trying to reward. It is also important to consider what stage of the business cycle the company is in, as the most suitable ESS plans would likely be different for, say, a start-up versus a large and well-established organisation.

Alternative remuneration structures

Although often considered first, an ESS might not always be the most suitable employee incentive arrangement for many occasions. Before proceeding with an ESS we generally recommend exploring whether an alternative remuneration structure or employee incentive plan could be more appropriate.

Some of the reasons for creating an employee incentive arrangement could include, but are not limited to the following:

• rewarding a valuable employee
• trying to incentivise the right behaviours, e.g. productivity, achieving sales targets;
• creating financial security for the employee; and
• protecting the business IP.

What would work best for my objectives?

It is important to review various employee incentive arrangements to choose the one most suited to achieving your objectives.

Equity

This option is your traditional employee share plan or scheme. Aligned with performance of the business as a whole, shares or options to apply shares enable the employee to become a shareholder in the company. This can lead to a business ownership mentality, and the employee is incentivised to grow the business. This in turn could maximise the value of the company shares and maximise profit. On the other hand, this arrangement can lead to unfunded tax liabilities, potential shareholder disputes, or issues arising from poorly documented agreements. It is important to remember that real shares bring real rights.

Bonus Plans

This type of arrangement links rewards to behaviours. Examples would include sales commissions or KPI linked bonuses. Bonus plans can work well when the right metrics and time period are chosen. The design of the bonus must be aligned with the business plan and purpose, and must consider long-term goals and be well understood by staff to succeed.

Phantom Equity

This is ultimately a contract between the business and the employee designed to incentivise certain behaviours that should be aligned with business goals. This can be as bespoke or as broad as required. Such arrangements are sometimes called Phantom Equity when the rewards available are linked to the broader business performance as a whole, like share ownership, but without many of the issues and complexities an ESS can attract. This form of employee incentive can work really well with the correct metrics, and it can add flexibility, delivering the best mix of bonus and equity options.

What next?

If you are thinking about implementing an Employee Share Scheme or other incentive arrangement for your business, you should be sure to cover off on the following:

• Ensure your incentive achieves your goals, this requires careful design;
• Engage with key people involved in the incentive plan to ensure their interests and goals align with those from the arrangement; and
• Appropriately document your contract and shareholder agreements.

Learn more

To learn more about what the right Employee Share Scheme or other incentive arrangement can do for your employees or your business, contact Murray Howlett, Bradley Hellen or your Pilot advisor on 07 3023 1300 or info@pilotpartners.com.au.