A key challenge for owners, large and small, is how best to keep management's attention and motivation aligned with those of the board and the owners of a company.
Share-based payment ("SBP") transactions are excellent tools for rewarding employees in organizations for achieving a specific goal, remaining loyal, and, more broadly, creating shareholder wealth. SBPs can also be used by a company to settle liabilities owed to suppliers and included as part of the consideration paid in a business combination (this will ensure that there is adequate profit linkage in future periods if included as part of the transaction).
Note that the reference to share-based payments is not limited to one class of share, as this also covers all instruments related to variable annuities, i.e., preferred shares, stock options.
SBPs are very common worldwide and, in general, in those companies listed on a primary or secondary stock exchange, i.e., the Colombian Stock Exchange. This is also true for those corporations with investments in Colombia that are listed on international exchanges and markets, where SBPs are common forms of incentives for directors, key executives, and in some cases, the general employee workforce. Yet, this is not limited to "listed" entities; there are private companies that are also implementing similar employee compensation schemes based on "phantom" share schemes.
SBPs can also be used to provide a short and long-term reward or both to match the company's short and long-term strategies/objectives.
In Colombia, we are seeing more and more versions of share-based payment transactions where business owners are looking for innovative and different ways to leverage key management and the larger workforce to meet the organizations' annual objectives. In our client base, we are asked to comment on the benefits of implementing "share-based payments" as a form of employee compensation. This has led the RSM team to shed some light on the advantages and disadvantages of entering share-based arrangements.