We have heard from many of the business people we work with that there are two things that they’ve been particularly concerned about as a result of the impact of COVID-19 on their business. The first is maintaining cash, particularly through the uncertainty of what the medium-term economic impact will be of the coronavirus epidemic. The second is looking after their people.
The immediate impact of the forced closures that Governments across Australia implemented in response to the Coronavirus was to significantly impact the ability of many businesses to generate revenue and cash. Labour costs are a significant chunk of many businesses’ expenses and it can be hard to look after your people when you have limited cash resources. The Government has eased the burden, at least in the short term, through the Job Keeper allowance, but what options do businesses have to balance looking after their people and maintaining cash resources into the longer term?
One means of potentially rewarding employees, aligning their interests with that of the business and boosting company value may be to incentivise them through some form of equity incentive scheme.
There are numerous studies from esteemed universities across the globe that indicate that employee share ownership is generally linked to better productivity, pay, job stability and company survival. Even the Department of Industry, Innovation and Science has concluded that companies that adopted equity incentive schemes produce higher sales, higher labour productivity and higher value-added growth (and small to medium businesses achieve the greatest benefit from the positive relationship between equity incentive schemes and company performance).
In Australia, the use of equity incentives for employees has historically been patchy, due to what were seen as inefficient tax outcomes. However, we have seen a resurgence in the use of equity incentive schemes in recent years as the current regulatory environment has addressed many of the previously perceived problems. In addition, in 2019 Treasury released a consultation paper around simplifying regulatory administration to further assist small and medium-sized businesses to provide equity incentive schemes.
Three of the more common forms of share or option schemes adopted in Australia are:
- Startup concession schemes – which can allow employees to reduce the tax on any upfront discount to ‘nil’
- Tax-deferred schemes – which allow employees to defer paying tax on the upfront discount to a later date (typically when they are able to sell their interests to fund the tax)
- Loan funded share plans – which typically issue shares without an upfront discount as a result of a loan being made by the company to the employee. That loan is typically limited in recourse so that the employee only needs to pay it back to the extent that the equity interests acquired generate cash returns.
Each of these has a different tax treatment for employees but they all provide significant flexibility in achieving the particular commercial intent of your company. This flexibility can include (amongst other things):
- Triggering rights based on the employee’s performance, or other conditions
- Limiting the voting or decision making influence of the employee
- Ensuring control of the underlying securities remains with the original owners
- Ensuring that ex-employees have to give up their rights
Given the current financial climate, equity incentive schemes that are properly structured may provide employers with a viable alternative to cash remuneration, offering significant and valuable incentives to employees to add value to the companies for which they work at reduced cash remuneration.
If you’d like to discuss how such a scheme may be utilised in your business to help you meet your goals of maximising cash and looking after your staff, please speak with Gerry Cawson or James Burchnall.