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Incentivising key employees and retaining talent

Incentivising key employees and retaining talent

Daniel Pegdon      Varun Kumar      

Forward thinking businesses understand that retaining key loyal staff, especially in the current environment is critical to business survival and igniting growth, but how do you keep staff happy in such difficult trading conditions?

In an ideal world, whilst you would like to provide remuneration in a tax-effective manner to employees, these decisions may be driven by a business’s cash position. Getting creative with how your business rewards employees will provide the best opportunity possible to retain the talent it needs to encourage its growth and continued success.

Employee Share Schemes
Employee Shares Schemes (ESS) are an attractive way of increasing staff productivity and ultimately the company’s value. ESS can be set up in such a way that employees are granted equity interests with restrictions imposed on disposal until a later date.

Generally, employees include in their assessable income the ‘discount’ component of the ESS interest (broadly the difference between the market value of the underlying interest and the amount paid to acquire the interest – often nothing) and are subsequently assessed under the capital gains tax provisions on disposal. The point at which the employee is liable for tax under the ESS provisions on any ESS interest varies depending on the terms and conditions of the plan itself. This may be taxed upfront, or at a future point in time prior to its disposal.

ESS plans may be costly to set up and require legal and taxation advisors involved to ensure all ASIC/ATO compliance requirements are met. Lastly, a company cannot claim a tax deduction for the shares issued to the employee – employees themselves need to be comfortable with the arrangement and its tax implications.

ESS for startup companies
If eligible, certain start-up companies have access to provide lower cost ESS plans for which the ATO has made available a standard templated employee share/option plan. Further, the reporting requirements of these plans with ASIC is reduced by providing conditional relief from disclosure and compliance requirements. Reduced compliance costs mean eligible start-ups can seek to offer equity in the business, alongside attractive tax benefits for employees taking part.

Among other conditions, the requirements for a company to access these concessions include:

  • Qualifying as a start-up company – broadly defined to be a company with an aggregate turnover of less than $50m, not listed on any stock exchange (in the income year prior to issuing the ESS) and incorporated for less than 10 years.

  • Certain conditions about the maximum value of the discount depending on the type of interest.

  • Employees cannot hold more than 10% ownership or voting rights in the company.

  • The scheme is operated so that employees must hold the ESS interests (or any share acquired as a result of exercising the interest) for a minimum of either:

    • three years, or

    • until your employee ceases employment

Eligible employees who receive interests under these plans are not required to pay tax on the discount component of the interest issued and will not be liable for any tax until such a time that the employee subsequently sells those interests.

Like traditional ESS plans, a company cannot claim a tax deduction for the shares issued to the employee.
This can be a huge concession for employers, however care needs to be taken to structure the plans in such as way that the interest issued qualify for the start up concessions.

Phantom share plans/share appreciation rights
An alternative is available to those businesses that would prefer not to provide equity to employees. A 'phantom' share plan is one which works like an ESS, but rather than an employee receiving shares, the employee receives cash on completion of certain time-based milestones or appreciation in company share price.

While this results in a cash outlay, these may be preferable to those employers who want to link employee performance with the increase in the company’s market value and have the cash resources to do so. Payments of this nature are treated as any other cash bonus and taxed under the Pay-As-You-Go (PAYG) system, meaning they are subject to withholding tax when paid and may be subject to superannuation guarantee. The employer can claim a tax deduction for any payments made under these plans.

Salary sacrifice arrangements
Salary sacrifice arrangements, if structured correctly, can be tax effective and provided to employees at minimal cost to the employer. Under a salary sacrifice arrangement, employees agree to forgo future salaries or wages pre-tax in lieu of non-cash (i.e. fringe) benefits.

When an employee salary sacrifices a benefit, the amount may be subject to Fringe Benefits Tax (FBT), currently 47%. Where FBT exempt or concessionally taxed benefits are salary sacrificed, the employee can receive a pre-tax benefit that is also exempt, or a reduced amount of FBT payable on it.

Some examples of exempt or concessionally tax fringe benefits include low value benefits such as use of work-related laptops and mobile phones, but may also extend to high value benefits such as cars, relocation costs, living away from home allowances and remote area housing.

Salary packaging can be offered to employee in so many more situations than simply superannuation or motor vehicles. Your Moore Australia advisor is well placed to help you understand FBT, and how it can provide significant savings for your employees.

Performance and time-based bonuses
Strategically linking bonuses to key performance indicators (KPIs) is a great motivational tool to facilitate staff improvement, business growth and inclusion within the business. The key is linking the bonuses to KPIs relevant to the employee’s job profile and the strategic goals of the organisation. In practice, one of the main failures of performance-based bonuses is linking KPIs which may be outside the employee’s control. 
Appropriate and well considered performance based bonuses can be set with either short term or long term targets and can act as a great retention strategy linking performance with the business’ ultimate goals returning a greater profit than their cash outlay.

The table below is broad summary of the pros and cons for each option:


Description Cash flow impact Advisor costs Tax deduction Employee taxation
ESS Nil High No Taxed on discount and then on sale under CGT provisions
ESS - start ups Nil Low/Moderate No Concessional - only taxed on sale under CGT provisions
Phantom share plans Yes - but deferred Low/Moderate Yes Taxed on amounts under PAYG system
Salary sacrifice arrangements Negligible with careful planning Low/Moderate Yes Not subject to further taxation at employee level (note, employer is not liable for FBT on exempt benefits)
Performance bonuses Yes - may be deferred Low/Moderate Yes Taxed on amounts under PAYG system

While some of the options discussed above relate only to companies and would be unsuitable to businesses who trade through a trust, there are some programs you could consider which can be done in a tax-effective manner to future-proof your business and ensure key staff are retained and are working toward a common goal.

Whether the employee incentive programs outlined above are appropriate for your business depends on your own circumstances. An initial discussion with your Moore Australia advisor would be a great place to start to see if any of the incentives mentioned would suit your business and organisation.