A key challenge for owners big and small is how best to keep the attention and motivation of management aligned with those of the board and ultimately the owners of a company.
Share based payment (here with “SBP’s”) transactions are great tools in rewarding employees of the company for meeting a specified target, remaining loyal and in more broader terms creating wealth for shareholders. SBP’s can also be used by a company in settling the liabilities owed to suppliers and included as part of consideration paid in a business combination (this will ensure there is an adequate link to earn out periods should this be included as part of the transaction).
Please note that reference to share based payments is not restricted to a class of share as this also covers all equity related instruments i.e. preference shares, share options.
SBP’s are very common around the world and in general those companies that are listed on a primary or secondary exchange i.e. Australian Stock Exchange. This too is true for those that are listed on the New Zealand Stock Exchange (‘NZX’) where ESP’s are common forms of incentives for directors, key management and in some cases the wider employee workforce. This however is not limited to ‘listed’ entities with private companies are also implementing similar employee remuneration schemes based on ‘phantom’ share schemes. SBP’s can also be used in providing one or both short and long term rewards to match short and long term strategies/ goals of the Company.
In New Zealand we are seeing more and more versions of share based payment transactions where owners of the company are looking for innovative and different ways in driving key management and the greater workforce to meeting annual targets of a company. In our own client base we are being asked to comment on the merits of share based payment transactions as a form of employee remuneration. This has prompted the team at RSM to shed some light on the advantages and disadvantages of entering into share based arrangements.
Advantages (not limited to)
- Remuneration of employees can be settled in a non cash form at the outset of the agreement.
- Aligns the performance of individual(s) with the performance of the company as a whole i.e. business value.
- Can be used to settle liabilities of the company where cash flow is considered tight.
- Driver of overall business value.
- Can be used as a sign on benefit to entice key prospects in terms of key management appointments.
Disadvantages (not limited to)
- Accounting can be complex as there is a number of considerations to cover off under NZIFRS 2: Share based payments.
- Valuations of certain SBP’s can give a fair value that is higher than expected. Valuation s due to complexity will need to be valued (the case for options).
- Is effectively diluting current ownership as you are giving away rights to ownership.
- Significant consideration will need to be included in agreements to avoid any unintended consequences.
Before share based arrangements are considered as a potential tool to remunerate key employees or settle supplier liabilities it is prudent to ensure agreements are carefully drafted to ensure arrangements meet the purpose of the issue without creating undue risk for both parties to the arrangement. Based on the agreements we have seen company’s on occasion fail to consider the full impact of business, accounting and tax issues for all stakeholders. There is of course a challenge to what is ultimately presented as an arrangement to get acceptance of terms by employees (suppliers). Finding a balance that has adequate business protection (i.e. what happens if the employee leaves if considering a long term agreement), offers appropriate levels of reward without significant tax obligations to the employee may not be reached. However looking at a scenario where 4 out of 5 key points are addressed may well work and be accepted by both parties.
If you are considering using an employee share scheme to promote growth and get the most out of your workforce RSM have the resources and expertise to assist your company in ensuring all bases are covered.