We frequently receive enquiries from clients in Sydney regarding the available options to reward and motivate their staff. Accountants in Sydney can offer a range of alternatives for employee rewards, each with its own advantages and disadvantages. To assist you in your decision-making process, we have compiled a list of several options for you to consider.
The ones below are the financial-based ones only. There are other ways to reward employees that could include non-financial rewards like recognition, positive feedback, more responsibility, better work conditions, additional improved equipment provided, non-cash gifts, time off work, additional leave, and the like that are ad-hoc for achieving specific performance. Some of these may have tax ramifications, so it is essential to discuss them with us before you go ahead and reward the employee in this way.
The financially based rewards are as follows. We have put a few comments about each below:
- Bonuses
- These are provided as a reward for specific performance. For them to be effective, the performance to be rewarded needs to be clear, understandable and attainable so the employee knows exactly what they have to achieve to receive them. Specific Key Performance Indicators (KPIs) that must be achieved before a bonus is received are the best way to motivate employees to attain the set performance levels.
- The reward should be enough to motivate them to try to achieve the level of performance.
- It should also be commercial for the business, so you are giving a reward that means everyone is happy. You have increased profit in the business, and the employee has received a reasonable reward for helping you do this.
- Bonuses lose effectiveness if the employee feels they have no control or influence over attaining them.
- Can be structured in a way that they are paid after a certain period of time so they help with staff retention (ie they will want to stay longer to be eligible to receive the reward)
- While they may help motivate employees, they are not as effective as having equity in the business and will probably not keep the employee in the business long-term without all the other areas of the role satisfying them.
- Employee Share Schemes
- These schemes give employees a share in the company that they work in.
- It can be done at a discount to the value of the share, but this does have some tax ramifications that need to be appropriately contemplated.
- Sometimes done by way of providing an opportunity to buy shares in the future at a particular price. This is called a right or option.
- There are usually performance criteria that the employee needs to pass to be eligible for the shares. This can provide significant motivation to the employee to reach the performance level. If the performance needed is challenging, then, if reached, the company is happy to provide the shares as they have benefitted from the result of the employee’s performance.
- To be eligible for the Tax office concessions available to these types of shares, there are significant conditions to be satisfied. This may make it problematic to offer this type of reward.
- If the ATO conditions are not satisfied, then the tax ramifications on the employee getting shares at a discount can be onerous. That is, they pay tax on the discount but don’t have any cash to pay the tax (as they have not sold the shares yet).
- Dividend Access Shares (DAS)
- Issuing an employee with a DAS to allow dividends to be paid to the employee at the Directors’ discretion when the employee’s performance warrants it.
- Provide a very discretionary way of providing a dividend to an employee. There is no requirement to pay the dividend unless the directors feel like it.
- While it does give equity to the employee, they don’t have any beneficial ownership, so the share may not get motivation from the employee you would be targeting.
- This can cause problems for the business owner in accessing the CGT Small Business Concessions on the sale of the business.
- Equity purchased by the Employee at, or below, Market value
- If you can get past the tax issues for the employee (ie there are tax ramifications of receiving shares below market value), this can be one of the best ways to motivate employees. They commit to the business and believe in it as they are prepared to put their own money up to buy into the business. They are then motivated to ensure the business does as well as possible as they share in the profits from that point on.
- Total commitment to the business as they feel part of it. The best option is to keep good employees at the company.
- There needs to be a well-draughted shareholder agreement to ensure there are solutions in place should the employee not come up to scratch or to enable you to get the shares back should they leave. This will include what value is paid to them for the shares should they leave.
- This method gives the employee a beneficial interest in the business and a right to be involved, within reason, in running the business and has a say in the decision-making.
- If the arrangement with the employee doesn’t work out, extracting the business from the relationship is much harder than with the above options, which are more discretionary. This is the main reason many businesses don’t offer this opportunity.
- Depending on the value of the business, an employee may not be able to afford to pay for shares in the company. Funding alternatives would need to be considered to make it more attractive for the employee to invest in the business.
- If the shares are sold or issued to the employee at a discount to their actual value, then there are tax ramifications in the employee’s hands similar to those outlined above (ie have to pay tax on the discount but with no cash to be able to pay the tax)
This gives the different reward levels available to you as a business owner. It depends on what you are trying to achieve and which one you go with. While equity is more likely to get buy-in from the employee, the responsibility to the employee and the difficulty in extracting them if it doesn’t work out can sometimes put businesses off this option.
Please contact your client manager if you wish to discuss the above options.
Kreston Stanley Williamson Team
*Correct as of August 2017
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
