The proposition is straightforward – allocate some shares to employees so that their interests become aligned with that of investors. Employees get a right to share in the profits of the company and the company gets motivated employees with pride of ownership who stick around.
Implementation on the other hand involves deliberation on a number of variables. Schemes had been rare in New Zealand because of compliance costs under the old Securities Act 1978 and tax complexities arising from benefits of the scheme being taxable income to employees.
These days the Financial Markets Conduct Act 2013 (which replaced the Securities Act 1978) has greatly simplified disclosure requirements for schemes and the required disclosure can be bundled into a single document. In terms of tax there has been some reform, as recently as March 2018, but tax still needs to be considered carefully. Employers will need to consider issues such as the taxable benefit to an employee if they receive shares for less than market value, deductions available to employers for managing the scheme and whether an exempt plan will achieve the desired outcomes.
An employee share scheme can be structured in a number of ways. These include:
- New or existing shares acquired by employees for a payment. The method of payment can be variable, for example the company may loan the money to the employees to buy the shares and issue cash bonuses to the employee to repay the shares.
- Tax-exempt plan. An “exempt” plan has some tax exemptions as long as the plan is open to at least 90% of employees on an equal basis along with meeting certain other criteria.
- Share options. Employees have an option to buy shares in the future but for a pre-determined price.
- Phantom share plans. These are not really a share scheme in that employees do not receive or acquire shares. Rather, it is a renumeration scheme that gives employees “phantom equity” by pegging remuneration to the performance or value of the business. For example, by giving employees a set percentage of the increase in the value of the business.
All of the above will have a number of variables which affect the mechanics of the chosen scheme. For example, whether shares are held by a custodian or the employee directly, the employees to which the scheme will apply or the percentage of shares to be offered under the scheme.
The form or structure of the scheme should tie in with the purpose of the scheme. The reasons for having a scheme could include:
- Succession: To retain key employees for the long-term, in which case a scheme which formally vests shares is likely better.
- Performance: To reward employees for performance only, in which case a “phantom share plan” may be enough.
- Start-up: To free up capital which would otherwise be used in employee remuneration and instead offer employees a share in the future success of the company.
The above is an outline to prompt some consideration of employee share schemes. Ultimately the most efficient scheme, if one is used at all, will depend on a thorough distillation of the company’s objectives.