From Level 3 lockdown and beyond – incentive schemes to motivate employees
The impact of the Covid-19 pandemic and the resultant lockdowns that have been imposed by governments around the world have left few businesses and industries unscathed.
Kemp Munnik, head of Structured Solutions at Bravura, considers the implementation of share incentive schemes to mitigate financial sustainability challenges.
As lockdown strategies have inhibited the operational ability and subsequent earning potential of businesses, many have had to take drastic measures in their efforts to survive. This has included seeking payment relief terms from suppliers and landlords and undertaking staff retrenchments. Additionally, many businesses are having to incur higher levels of debt in order to safeguard their sustainability.
In South Africa, a shrinking and uncertain world economy is even more discouraging given our already struggling domestic economy. Within the listed company space in particular, business uncertainty has manifested in the announcement of expected reduced earnings forecasts and the cancellation of dividends.
As cash reserves are required to weather the storm, costs are being cut wherever possible in an effort to ensure business continuity. Salaries and wages are generally the biggest single expense item (after taxation) in most businesses. Besides retrenchments, the easiest way to cut salary costs is to cancel bonus payments, limit salary increases or even reduce salaries. This unfortunately can lead to an unmotivated and under-incentivised staff complement. Thus a critical question to consider is how to successfully implement a recovery strategy or continue to grow the business in this context.
The unique opportunity of Share Incentive Schemes
Share Incentive Schemes offer a unique opportunity for employers to incentivise and simultaneously motivate employees by providing them with a vested interest in the recovery and growth prospects of the underlying business. If structured correctly, the Share Incentive Scheme will limit the outflow of the critical cash resources that companies urgently need to preserve in these uncertain times. If structured correctly, the Share Incentive Scheme could, in fact, be cash generative by reducing the employers’ income tax charge.
The purpose of Share Incentive Schemes is to motivate, retain or attract the correct employees. Their potential application is not limited and may be broad-based, focused at the executive level or limited to a specific focus group of employees.
Given the current environment, it is critical that management and employees are incentivised to assist in order to ensure that the business successfully navigates through this crisis period. Share Incentive Schemes are an innovative opportunity for employees to participate in the recovery of the business once it returns to business as usual.
The caution is that if not structured or implemented correctly, Share Incentive Schemes may have many pitfalls from a commercial and tax point of view. It is imperative that employees are in fact incentivised and practically able to unlock the value that they have assisted in creating for their employer. This must be done in a manner which is equitable to all and which does not result in unintended tax outflows that may be improperly matched to the resultant cash inflows generated from unlocking the value.
Further benefits of correctly structured schemes can also include the assistance of individuals in their estate planning to derive savings in tax and other costs, as well as employers being able to obtain a tax deduction without the employee suffering any immediate tax liability.
Amidst the Covid-19 induced crisis which has driven current share values to a low and shaken business confidence to its core, the need to motivate both management and employees should be a keen consideration. In this context Share Incentive Schemes can provide an innovative opportunity for management to successfully navigate the crisis while at the same time ensuring a staff complement that is motivated and engaged in the process of value creation.