Once the domain of ASX listed companies, multi-nationals and large corporates, privately owned mining and resources businesses are increasingly offering employee share schemes as a retention tool for key employees.
The secret to successful employee share scheme implementation for smaller, albeit progressive and successful mining and resources businesses, is to provide an attractive bundle of incentive arrangements to key staff, while avoiding undue administrative burdens for both business owner and employee.
The highly competitive nature of the mining and resources employment environment has meant privately owned businesses need to up the ante if they hope to attract and retain quality personnel.
While a generous salary is almost always an incentive, there’s a limit to the depth of a private employer’s pockets especially when compared to potential offers from much larger industry players.
However, in my experience, quality recruits do recognise there can be more to their working life than transacting their often highly skilled effort for a pay cheque. More and more they want some level of ownership in the business that employs them, providing purpose for personally driving its success.
I’ve found the more effective employee share schemes (ESS) for privately owned businesses are generally much simpler than those of their corporate counterparts, especially for businesses that are implementing these sorts of schemes for the first time.
Private businesses are by design leaner and often have little interest in adding additional administrative burden. In contrast, a typical corporate ESS model can require teams of HR and accounting support personnel to manage what can be complex and convoluted ESS requirements.
In my experience, assuming a privately owned business has adequate financial and accounting procedures already in place, ESS solutions can be implemented that largely dovetail with those existing processes.
Keeping ESS administration simple includes identifying short, medium and long-term strategies and clarifying how an ESS can incentivise key personnel to stay and achieve business goals.
Short Term
In my experience, cash bonuses can be an obvious win-win for a company keen to achieve stated goals within defined timeframes. Although not an ESS itself, short term cash bonuses are generally simple arrangements employers can offer to key employees to incentivise them. Administration of cash bonuses is also relatively straightforward.
I would generally recommend business owners consider including cash bonus arrangements as part of any staff retention strategy.
Medium to Long Term
Privately owned companies may also consider offering non-recourse loans to allow key staff to buy into the company.
The non-recourse nature of the loan provides little, if any cost or risk to the employee as the loan is usually repaid using dividends earned as the company grows and succeeds. The company’s success would presumably be a result of, at least in part, the employee’s endeavours.
Should arrangements go pear-shaped, under the terms of a non-recourse loan there is no requirement for security to be held over private assets such as the employee’s family home, as the shares would simply be returned to the company in order to satisfy the loan.
Where the shares are provided at market value, the complexity of ESS tax legislation should not apply.
In addition, the complexity of the Division 7A rules generally will not apply to the company as the loan is provided before the employee becomes a shareholder. Fringe benefits tax also generally will not apply as the loan will have been used for a deductible purpose.
For privately owned companies, it’s a method that can incentivise key employees to have ‘skin in the game’ at relatively low risk and minimal administrative burden.
Long Term
Taking the longer view, there is a strategy that involves making use of the ESS valuation rules to provide “free” options to key staff to incentivise them to generate significant long term value for the company.
Under the valuation tables in the ESS regulations, there are certain combinations of option exercise periods and option exercise price/current value ratios that can result in options being deemed to have no upfront value. Despite this, it is not unreasonable for these sorts of options to become valuable in the future should the company increase substantially in value.
If these sorts of arrangements are correctly structured and implemented, it should be possible to issue “free” options to key staff that have the following characteristics:
- no or minimal tax incurred upfront
- no or minimal tax incurred on exercise
- the end capital gain by the employee on the disposal of the underlying shares being subject to the 50% CGT discount
These sorts of arrangements do impose a slightly higher administration burden on the company. However, the circumstances where these options become valuable usually coincide with significant increases in company value – so this administrative burden should be manageable.
On the flipside, should the necessary increases in company value not eventuate, the options should expire naturally and should not result in any additional administrative work.
Additionally, while employee share schemes are proving valuable in attracting talent and retaining key staff, they can also play a role in succession planning and transferring business ownership from exiting or retiring business owners to long term employees.
Should you have any questions about privately owned business employee share schemes or to request a 20-minute no obligation discussion, please contact Craig Barry on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au
Craig Barry is an accountant and specialist tax adviser who has worked with mining and resources clients for his entire professional life. To learn more about Craig you can read his profile here.
Resources Unearthed is a solutions hub that connects senior executives, established professionals and business owners in mining and resources with proven specialist advisers.
