Are Shares Better than Cash for Rewarding Team Members?

“How workers are paid is how they think” is a favorite mantra for employee incentive specialist, John Day.

He says if people are paid for a nine-to-five job then they will simply work from nine to five. But those who are paid like an owner, with incentives such as share and bonus schemes, will behave more like an owner. 

Day is a chartered accountant with Kenneths Group which focuses on employee remuneration and incentive packages. He draws from his own background as the son of a dairy farmer to make an analogy between a sharefarmer and a factory worker.

“I believe a ‘sharefarmer’ has a lot more at risk financially and has longer working hours but is prouder of his work than a factory worker,” says Day.

The difference is that the sharefarmer can see the milk in the vat at the end of each day. He can see the product of his work and shares in the benefits to the business.

Day says “employees are the most important part of a business” and incentive schemes should be used to reward, retain and motivate them and to help “build respect, transparency, trust and teamwork.”

Day claims employee incentive programs have helped some of his clients improve profitability by 50 to 70 percent and reduce staff turnover from 14 percent to 4 percent.

Equity-based incentive schemes include rewarding valued team members with equity in the business, and shadow share plans (otherwise known as phantom or replicated share plans) whereby a team member is paid a bonus when certain performance criteria are met.

Although such schemes are not widespread in the smaller business sector there is an increasing level of interest.

In Australia, for example, a survey of 600 businesses employing fewer than 20 people which was undertaken earlier this year by CPA Australia showed that 1 percent of businesses offered an employee share plan and 4 percent had an equity scheme in place.

Of the remaining respondents, almost a third said they would consider introducing share plans or equity schemes to keep valued team members.

Other popular methods of rewarding good performance in small business are praise and recognition.

Gary Scarrabelotti, a specialist in employee ownership incentive schemes, notes that key team members are much more mobile in the current employment environment. Unless there is a tangible reason to stay, companies risked losing them perhaps at a growth time when they were most needed.

“Business have to give valued team members a reason to stay in the company and a mechanism by which they can share in the growth,” says Scarrabelotti.

Equity-based incentive schemes are more common in technology and services sectors and high growth start-up businesses.

Those company owners who shy away from them usually do so because of their reluctance to dilute their equity, and/or their aversion to chartering unknown waters. This is particularly because of the complexity of the legal, accounting and taxation issues involved.

Scarrabelotti notes that sacrificing equity to team members might mean less equity for the business owner in the short term, but a far greater value for a smaller share in the longer term if the company prospers.

He adds that there are tax advantages for both the employer and team members.

Scarrabelotti concedes that offering equity in a business is not a simple process because of the legal requirements that have to be satisfied. But this needs to be weighed up against the value of retaining good team members and boosting morale and productivity.

Valuing shares that are not listed and setting an acquisition and sale value in the event of someone leaving the company are among the basic hurdles that need to be overcome, according to Scarrabelotti.

He says these issues can be resolved by creating an ‘internal market’ within the company in which shares can be bought and sold within a specified period of time.

Due to the complexity of the issues involved, small business owners will need professional assistance from accounting and legal practitioners and there is a large potential market for you to tap into as an accounting professional.

There is no cheap solution, but if you want the business of smaller operators as an accounting professional you can opt to negotiate according to the ‘financial firepower’ of your prospective clients.

You can convince the business owner that if they are committed to promoting a company culture of shared ownership, the cost of putting the appropriate mechanisms in place should be seen a strategic investment in their team members, their most valuable asset, and long-term growth and profitability.

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Copyright 2002, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.