In March
2024, IDT hosted a webinar introducing the various leadership incentives
schemes that are available, specifically in an Employee Owned company. Led
by the PWC incentives team, the presentation gave background on the various
schemes possible, and how these can be incorporated into a wider all employee
profit share structure.
Why does
this matter for trustees?
As
trustees, our principal role is as shareholder, with an oversight to ensure
that the company protects and increases the value of the shares of the company,
however that value is defined, whether financial or otherwise. A large part of
this is ensuring that the leadership team are effective in their role, and are
incentivised to deliver benefit for all employees.
So isn’t
developing a financially based leadership incentive scheme contrary to this
profit share to all?
The key is
to ensure that those with leadership incentives are also tasked with delivering
greater value for the business that wouldn’t otherwise be available.
Identifying what their expertise is, and what the aligned deliverables are. By
encouraging this, all employees benefit through enhanced value and availability
of profit to share. Critically, leadership incentives should not be in
isolation of aligned employee benefit.
Key
Questions to Ask
So what are
the key questions that should be asked?
- What
are the deliverables and how will they be measured and monitored?
Be
clear on these, take the time to get them
right, map them against potential good and bad times, ensure they are
monitored, and don’t pay out if they’re not delivered.
- How
does this deliver more for
all
employees?
Ensure the scheme’s alignment to
the principles of employee ownership and benefit for all. Reinforce activities
that are EO focused within the terms of the scheme, so that the principle of
benefit for all, and employee participation, are incorporated.
- How
will the wider Employee group be incentivized?
Ensure that all employees have an opportunity
to share in profit, preferably in priority to any leadership incentives, or at
least at the same time. As the quantum of the profit share pot is agreed,
ensure a percentage of this pot is set aside for distribution to all employees.
Equity Based
Schemes
Although
the shares are held by the trustee as a majority shareholder, there are
possibilities for an equity based scheme to be structured, as long as the
trusts’ majority shareholding is protected.
Equity
based schemes can be tax efficient ways of incentivizing leaders, whilst also
ensuring that the cost to the business isn’t prohibitive. Their implementation
and the relevant applicable taxation model comes with conditions largely based
on company assets, size, number of employees and legal structure. Note that
being employee owned is not a barrier to implementing an equity based scheme,
but it does require specific considerations.
Trigger
events, or exercise options, can be included prior to full payment of any
vendor loan or deferred consideration. Whilst good leaver provisions can be
incorporated to incentivise those with an expected shorter tenure, as can
conditions aligned to long-term sustainable company growth.
Cash
Based Schemes
Not all
schemes have to be equity based, and within an EO company, it may be preferable to not dilute shares to multiple holders.
Cash based
schemes provide a lot more flexibility and can easily incorporate bespoke
performance conditions or payment dates. They also have the benefit of being
easy to administer and can sit alongside other schemes in place, including EO
profit sharing.
In an EO
company still within its vendor loan repayment term, being able to incentivise
through cash payments before repayment of the loan, with a greater distribution
after the loan has been repaid, can help to even out the balance sheet, and
encourage leaders to remain with the business after the vendor loan has been
repaid.
If the
business increases its profit above the original expectations under the
repayment schedule, this may also encourage leaders to seek to repay the loan
early thus freeing the vendors to their new life, reducing the cost of the financial
repayments to the business, and directing profits to leadership and employees.
Scheme Purpose?
Be very
clear on what the purpose of the scheme is and ensure this is incorporated into
its terms.
Examples
include incentivizing rising leaders of the future, using the scheme to
incentivize leaders to develop their successors, or ensuring that staging
points allow for new members to join. This can then be part of succession
development of the next tier down in the organisation.
Where a
leadership team may be of an age similar to that of the vendors, consider adding
trigger points where members can take out from the scheme, for example as good
leavers on retirement.
Scheme
Timelines
Depending
on the purpose of the scheme, various trigger points, or staging points, can be
incorporated. These don’t have to be time based. They could instead be aligned
to hitting identified profit margins and targets.
Be creative
in a way that delivers for the business. But aim to be simple to monitor, easy
to implement, and flexible enough to adjust for future known, and unknown,
events, such as new joiners, expansion or contraction.
Complexity
and Transparency
Wherever
possible, keep the scheme simple – to administer, calculate and pay out.
The time and resource taken to administer, review and apply the scheme can become extensive if it is not well structured and documented at the outset - time that is better
spent delivering for the business.
Also, consider any other incentivisation or contribution schemes may be in place. Review existing, or new, success fees, sales bonuses, and other incentivisation schemes across the business, not just employee profit sharing. Can the
company afford all these schemes, has time created more complexity, how do they interact with each other, do any individuals get
multiple benefit, and how will they be administered?
Too often
post EO transition schemes are a continuation of what is already in place or deliver on a desire to compensate those
individuals closest to the vendors, compensating them for their loyalty rather
than future delivery under the new ownership structure. Care should be taken to
ensure that all schemes deliver for the future, under its new EO ownership
structure, and for the benefit of all employees. The transition to EO is
a great opportunity to reflect, review and refresh what incentivisation at all
levels looks like under the company’s new ownership.
If you
would like to know more about EO incentivisation schemes, or to receive a copy
of the webinar slides, contact IDT at info@directorsandtrustees.co.uk
