Reward Structures for Staff

Current as of August 2017

 

We often get asked by clients of what options they may have to reward and motivate their staff. There are various alternatives available as to how employees could be rewarded. Obviously there are  pros and cons of each.  Below we have listed down some alternatives for you to consider.

The ones below are the financial based ones only. Obviously there are any number of other ways to reward employees that could include the non financial rewards like recognition, positive feedback, more responsibility, better work conditions, additional improved equipment provided, non cash gifts, time off work, additional leave and the like that are adhoc for achieving certain performance. Some of these may have tax ramifications so it is important to discuss with us before you go ahead and reward the employee in this way.

The financially based rewards are as follows. We have put a few comments about each below:

  • Bonuses
    • These are provided as a reward for specific performance. For them to be effective the performance to be rewarded needs to be clear, understandable and attainable so the employee knows exactly what they have to achieve to receive them. Specific Key Performance Indicators (KPI) that need to be achieved before a bonus is received are the best way to motivate employees to attain the performance levels set.
    • The reward should be enough to motivate them to try to achieve the level of performance.
    • It should also be commercial for the business as well so you are giving a reward that means everyone is happy. That is, you have increased profit in the business and the employee has received a reasonable reward in helping you do this.
    • Bonuses lose their effectiveness if the employee feels that they have no control or influence over being able to attain them.
    • Can be structured in a way that they are paid after a certain period of time so they help with staff retention (ie they will want to stay longer to be eligible to receive the reward)
    • While they may help motivate employees they are not as effective as having equity in the business and will probably not keep the employee in the business long term without all the other areas of the role satisfying them.
  • Employee Share Schemes
    • These schemes give employees a share in the company that they work in.
    • It can be done at a discount to the value of the share but this does have some tax ramifications that need to be properly contemplated.
    • Sometimes done by way of providing an opportunity to buy shares in the future at a particular price. This is called a right or option.
    • There are usually performance criteria that the employee needs to pass to be eligible for the shares. This can provide significant motivation to the employee to reach the performance level. If the performance needed is challenging then, if reached, the company is happy to provide the shares as they have benefitted from the result of the employee’s performance.
    • There are significant conditions to be satisfied to be eligible for the Tax office concessions available to these type of shares. This may make it problematic to offer this type of reward.
    • If the ATO conditions are not satisfied then the tax ramifications on the employee of getting shares at a discount can be onerous. That is, they pay tax on the discount but don’t have any actual cash to be able to pay the tax (as they have not sold the shares yet).
  • Dividend Access Shares (DAS)
    • Issuing an employee with a DAS to allow dividends to be paid to the employee at the Directors discretion when performance of the employee warrants it.
    • Provide a very discretionary way of providing a dividend to an employee. There is no requirement to pay the dividend unless the directors felt like it.
    • While it does give equity to the employee they don’t really have any beneficial ownership so the share may not really get the motivation from the employee that you would be targeting.
    • Can cause problems for the owner of the business in accessing the CGT Small Business Concessions on sale of the business.
  • Equity purchased by the Employee at, or below, Market value
    • If you can get past the tax issues for the employee (ie there are tax ramifications of receiving shares at below market value) then this can be one of the best ways to motivate employees. They commit to the business and have a belief in it as they are prepared to put their own money up to buy into the business. They are then motivated to ensure the business does as well as possible as they share in the profits from that point on.
    • Total commitment to the business as they feel part of it. The best option to keep good employees at the company.
    • There needs to be a well drafted shareholder agreement put in place to ensure there are solutions in place should the employee not come up to scratch or to enable you to get the shares back should they leave. This will include what value is paid to them for the shares should they leave.
    • This method gives the employee a beneficial interest in the business and a right to be involved, within reason, in the running of the business and have a say in the decision making.
    • If the arrangement with the employee doesn’t work out then it is a lot harder to extract the business from the relationship than with the above options, which are more discretionary. This is the main reason a lot of businesses don’t offer this opportunity.
    • Depending on the value of the business an employee may not be able to afford to pay for shares in the company. Funding alternatives would need to be considered to make it more attractive for the employee to be able to invest in the business.
    • If the shares are sold or issued to the employee at a discount to their real value then there are tax ramifications in the employee’s hands similar to those outlined above (ie have to pay tax on the discount but with no cash to be able to pay the tax)

This gives the different levels of reward available to you as a business owner. It really depends on what you are trying to achieve as to which one you go with. While equity is more likely to get buy in from the employee, the responsibility to the employee and the difficulty in trying to extract them if it doesn’t work out can sometimes put businesses off this option.

Please contact your client manager if you wish to discuss the above options.

 

DISCLAIMER
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.