What you need to know
How’s your year going? Have you started seeing the Great Resignation in your business yet? Whether it’s resignation or quiet quitting, a lot of business owners have had to up their game in recent months in terms of looking after and re-wooing their staff to remain in place. One of the things that we’re hearing of being considered, and it might be the post FY22 timing as well as current skills/staff shortage, is the introduction of employee share schemes.
What’s an employee share scheme?
In essence, it’s where you offer your staff members a small share in the company in return for their efforts (on top of their salary, obviously). Think you grant them equity. They can then take or leave this offer depending on their circumstances. The plans have a lifespan of between 2-15 years (of course you can renew them).
An Employee Share Scheme is available to all companies, regardless of size or ownership (public/private). However, they’re still relatively uncommon in Australia – with only around 1% of businesses offering them. By comparison, in US businesses, more than 20% of firms offer employees share options. But we can see this might increase in the nearer-term.
It’s a little different from the Employee Share Option Plan (ESOP) – whereby the employee receives the option to be granted real shares at some other point in time (say if they stay for five years).
Why would you consider an employee share scheme for your business?
In a nutshell, Australian research has shown that it benefits business in terms of producing better productivity outcomes, increased sales (yes, you read that correctly) as well as talent retention and recruitment – especially around key roles for your business.
Research shows that replacing someone within your business costs you around in excess of 40% of their salary. And the more important they are, the higher that figure rises.
Plus, you’ll likely save on an immediate cash splurge, no longer having to increase someone’s salary in order to get them to stay. Which, let’s face it, could be a critical survival move in an economy that’s increasingly cash-strapped thanks to rising inflation and supply chain issues.
But the real kicker in the research? Small businesses benefitted the most.
Okay, sounds good from my perspective, but…
Why would this, essentially increased responsibility to the business, entice someone to stay?
Well, for a couple of good reasons;
- In addition to their salary, the employee also receives dividends if the company does well and profitability targets are met.
- Over time, as the business grows, the shares increase in value – thus the value of the shares then becomes a real investment.
- The employee, also now has a stake in the company’s success. A lot of people might find that motivating. It can make coming to work more meaningful – now they’re a part owner.
What should you think about if contemplating this for your business?
There’s still a considerable amount of red tape (as with so many things in business) and significant compliance measures to be across. However the ATO feels Employee Share Schemes could be a valuable contribution within the economy and is working to make ESS’ less complex – changes were announced in the 21/22 Budget. Let’s just say, it’s still a bit of a work in progress. Unless you’re a tax law expert, you probably wouldn’t want to manage this yourself.
However, if you’re thinking this sounds like something you could contemplate for your business you might start by considering the following;
- First things first, start by looking at your business structure. If you’re operating under a sole trader, partnership or trust, you’ll likely need to restructure to a corporate entity (a proprietary limited company).
- You’ll then need to create shareholder agreements that document how the shares are valued, both now and in the future. And what happens if/when employees leave the business.
- And in keeping with point 2, you’ll likely want your employees to start their ownership less likely to be saddled with the joys of any tax consequences. So you’ll want to consider getting a current market valuation for the business. You’ll also need to ensure you’re compliant with ESS reporting including providing your employees with statements at the end of FY.
- You might also like to consider your Employee Share Scheme in conjunction with any succession planning you’re doing.
- Are you really ready to give up ownership of your business? It might seem like a wonderful solution on paper, but also consider, if you could really give up being ‘the boss’. If you’ve got more of an autocratic work style, maybe not. However, if you’ve always consulted the team widely, taken on their suggestions, etc, maybe this could be the solution you’ve been looking for. Either way it might be worth taking a closer look.
Of course, if we can help you better manage your business planning affairs, including looking at introducing Employee Share Schemes, you can call us on 6023 1700 or connect with us via Facebook or LinkedIn.
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