Employee share schemes can be a good way to reward key team members by sharing some of the pie. It can ensure engagement and give them ‘skin in the game’.
Profit share is also popular but involves no equity. As such it may be better suited to a wider range of employees.
The competition for talent shows now sign of abating. Share schemes can help to retain your most valuable staff members and also provide a possible succession plan for your eventual exit from the business.
There are two main methods used in New Zealand.
1. Loans to buy employee shares
This is probably the most common method. The shares in the company are issued up front to the employee who must then pay back the value of the shares loaned to them. This is typically an interest free arrangement with the employees required to repay the loan through their salary and any dividends issued by the company.
If care is given to structuring the arrangement the loan should not attract any liability for Fringe Benefit Tax (FBT).
The arrangement doesn’t have to exclude profit share or bonus payments. The scheme can include both the loan to purchase employee shares along with a cash bonus on the achievement of KPIs.
2. A Share Trust for employees
The company would establish a wholly owned subsidiary, the sole purpose of which is to hold shares on trust for employee participating in the scheme. The employees are not granted legal title to the shares but have a beneficial interest. One of the key advantages is that the subsidiary then exercises all voting rights. Dividends can be distributed to the employees or any proceeds of a sale should the business be subsequently wound up.
A trust deed is required to set the rules for administering this arrangement. It would include rules around paying out employees if they leave the employ of the company and how their shares should be valued.
Changes made to legislation now mean that these schemes no longer require a costly and expensive prospectus and disclosure information.
Who would you offer shares to?
We believe that any offer should be made selectively and almost always to senior team members. We think it is best practice to align a senior manager’s remuneration with the overall success of the business. It should also encourage collegiality and broader strategic behaviour. A well designed scheme should align employee behaviour with the interests of the shareholder(s) for the long term. Employee share schemes may make it less likely for an employee and to move organisations.
A profit share scheme may be more suitable to offer on an ‘across-the-board’ basis to all team members. These are typically paid annually (although not always) and can be seen as an intermediate option between short term incentives and equity. This is not as tax efficient for the employee as they will be pay PAYE tax on any distribution.
Perhaps it goes without saying but any of these schemes are complex and professional advice should be taken prior to implementing any equity or profit share scheme. This will almost certainly involve both accounting and legal advice along with input from an HR advisor.