Employee share schemes (ESSs) have become an important tool to recruit and retain talent, but there are complexities to the system potentially holding back wider spread use.
Early last year, national accounting, business and financial advice dmca introduced an ESS in an attempt to retain key staff members in the business in case directors retire or leave.
The firm now offers a percentage of shares owned by current or exiting shareholders to key employees at their calculated market value, which removes any adverse tax consequences for them. There is also a shareholder’s agreement in place to document things like how shares are valued in future, and what happens if an employee leaves.
It meant that dmca had to be restructured from a partnership to a corporate entity, with shareholder’s agreements created to document how shares are valued in the future and what happens if an employee leaves.
Currently, three senior employees have recently signed up to the share scheme, taking home a benefit from receiving dividends on top of their usual salary as profitability targets are met.
Director Tania Tonkin explains that the value of their shares is then a real investment in the business, increasing in value as the business grows.
Tonkin believes the schemes are a no brainer to turbo charge a business and help employees build wealth, but simpler government regulations and tax structures could help more small businesses adopt them.
“Any employee at dmca can become a shareholder in future. It means we can create an environment which makes it more meaningful to come to work every day and that translates to better engagement and buy-in.
“Having a scheme for employee buy-in makes for a more equitable environment – one where both workers, the C-suite, and all shareholders have aligned interests,” she says.
Rare as hen’s teeth
Despite the perceived benefits, Tonkin’s approach is extremely rare in corporate Australia.
Fewer than one per cent of Australian firms have any kind of employee options scheme in place, compared to around 22 per cent in the US according to the National Centre of Employee Ownership.
But as the skills shortage continues and high demand for all skill levels increases, offering higher salaries and other benefits may not be feasible to keep people for long periods of time.
Research from the Department of Innovation found that businesses with an ESS in place show better productivity and retain top talent for longer. These companies had lower employee churn, increased sales, delivered higher value and better productivity, and small businesses benefitted the most.
Barriers to entry
However, there’s still too many barriers and red tape, including heavy compliance rules and not enough tax breaks for those outside of the government’s current innovation scope, Tonkin says.
ESS programs can be costly to administer for most employers and can have negative tax implications for employees if the shares are given to them at less than market value.
“As the country recovers from the crisis of Covid-19, any reduction in red tape that encourages higher productivity should be actively encouraged,” she says.
The Australian Taxation Office agrees that ESSs are valuable to attract, retain and motivate staff, with recent changes to the regulatory framework to make them less complex and fragmented announced in the 2021/22 Budget.
By removing these regulatory barriers, it will be easier for a viable, but cash-poor business to hire employees with ESS offers, in addition to wages.
Embedding a scheme
Succession Plus founder Craig West offers clients assistance in setting up ESSs, usually because the business owners are in succession planning mode.
But since the start of the pandemic, he’s noticed an increased in small and medium enterprises enquiring about these schemes for recruitment and retention of key people.
Unlike bonus schemes, incentives and commissions, which have a place but are short-term, ESSs aim to maximise the value of the business over the long term by creating a team that’s single-minded about working towards and sharing the rewards of a successful and profitable business, West says.
“For employees, this can have a huge impact on their ability to create wealth, as it gives them access to dividend payments and growing capital value,” he says. “For the business, it can create value by aligning employees’ personal financial goals with that of the business, and encourage them to think like owners.”
For example, one client recently recruited a management accountant with an ad titled ‘Not just income – equity as well’ on the job ad. Other clients are allocating between 10 and 20 per cent of their equity, or shares, to employees on the basis that if employees own shares in the company they work for, they’re less likely to leave.
“The cost to replace one employee is approximately 45 per cent of their salary,” West says. “A $100,000 salaried employee costs about $45,000 to recruit, onboard and train, as well as lost intellectual property and relationships that left with the previous person in their role. Using an employee stock ownership plan to reduce staff turnover can therefore make economic sense.”
