Want to listen to the full episode and all our other episodes?
Hearsay allows you to fulfill your legal CPD requirements every year.
Our yearly subscription is only $299/year.
With a yearly subscription, you can access all of our episodes AND every episode we release over the next year.
Democratising… Ownership? Implementing Employee Share Option Plans
Practice Management and Business Skills| What area(s) of law does this episode consider? | Employee incentives. |
| Why is this topic relevant? | Attracting and retaining talent is likely to be one of the main focuses for law firms in 2023. After all, the people that make up a business are its most valuable asset. Anything that gives a competitive edge is inherently valuable. One competitive edge, of course, comes from employee incentives. However, a gym membership doesn’t solve the perennial problem facing business – lack of employee investment or engagement with the mission of the business. That lack of motivation can mean that owners and employees are pulling in separate directions. An employee share ownership plan – or ESOP – is designed to address this lack of engagement in the mission of the business by aligning employees with business owners. |
| What legislation is considered in this episode? | Income Tax Assessment Act 1996 (Cth) |
| What are the main points? |
|
| What are the practical takeaways? |
|
| Show notes | Australian Federal Government, Budget 2021-22: Budget Measures, 2022 Australian Taxation Office, Employee Share Schemes reporting requirements Australian Taxation Office, Employee Share Schemes standard documents BDO Australia, BDO Growth Index: An analysis of mid-sized businesses in Australia, 2021 |
| David Turner:
1:00 | Hello and welcome to Hearsay the Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on the go and at a time that suits them. I’m your host David Turner. Hearsay the Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services and Hearsay the Legal Podcast is how we’re improving the experience of CPD. Attracting and retaining the right people is one of the greatest challenges that business owners and founders face and it’s important to get that right because the people that make up a business are its most valuable asset. It’s no surprise then that attracting and retaining the right people is a key aspect of what makes any business successful. Now, of course, there are a range of employee incentives that employers can offer to attract and retain those right people. Above market remuneration greater flexibility, more leave, additional super contributions or partnerships and discounts with local businesses. But none of these incentives really offer a solution to a perennial principal and agent problem, which is a lack of employee investment or engagement with the mission of the business. That lack of motivation can mean that owners and employees are pulling in separate directions, even with all of those employee incentives designed to get people to sign on. However, an employee share ownership plan – or ESOP – is designed to address this lack of engagement in the mission of the business by aligning employees with business owners, by making employees business owners. Joining me today to demystify ESOPs is Craig West, founder and Executive Chairman of Succession Plus. Craig, thanks so much for joining me on Hearsay. |
| Craig West: | Thanks for having me. |
| DT: | Now, tell us a little bit about your career and background. You’re an accountant by training. What led to you founding Succession Plus? |
| CW: 2:00
3:00
4:00 | Yeah, look, I think as an accountant working with business owner clients, I felt doing well in those days there weren’t even BAS returns, but doing the compliance and lodging tax returns was all well and good and it needs to be done but A, it wasn’t very exciting to me. B, I didn’t feel like I was adding a hell of a lot of value to clients or contributing in any way to their major life goals or outcomes and I also had a couple of clients that went through the process of exiting their business. What I saw was just disorganised chaos. There was no process, there was no methodology, a lot of advisors hadn’t done it before. It was a very collaborative process. So, in other words, you needed lawyers, accountants, financial planners, banks, all sorts of other advisors involved in the process and so what I started to do was work with clients on what they could do to get themselves ready for an exit. I had a lot of baby boomer clients at that time. This is literally 25, 30 years ago but there were a lot of clients around that had never thought about exit, they didn’t know what their business was worth, they didn’t know what they could do or should do to get ready and so I actually started to focus more on the exit and succession planning aspects rather than the accounting work. In the end, I ended up out of the accounting practice in a succession plan that actually went pretty badly wrong. So, that was the first point. That was a really good lesson but you need to get these things right and, secondly, just working on helping clients and I found clients really valued that kind of work. It was a really key life milestone for most clients to actually successfully sell or exit or pass their business onto their kids and so I started to just work in that specific area, firstly on capital gains tax and small business concessions and so on which, again, was part of the puzzle, but it wasn’t the whole solution. So, over time I basically developed a process around exit and succession. I looked at different methodologies. I went to the States and did some study and worked on what’s called a certified exit planning advisor. Exit planning in the United States is a big industry. Here it’s not really and so that led me down the path of setting up a new business, Succession Plus, and, look, over time, I think too, the drivers behind exit and succession have changed. A lot of people now thinking about legacy and a lot of people come to us now, not so much asking, “how can I sell my business for the most possible dollar value?” But it’s more about “how can I look after my staff? How can I look after people that have worked with me for 20 years?” And hence the interest in employee share plans and that became a real driver then for people to start to say, “well, I do want to exit and I’m happy to get as much money as possible, obviously, to fund my retirement, or do the next thing I’m going to do but I really want to look after staff.” And so that drove a real interest in me to find out more about employee share plans. There weren’t a lot of people doing them, they weren’t very popular in Australia, they’re massive overseas in both Europe and the US particularly and so I did a lot of study, got involved, did some research, read everything I could find and then basically looked at that as a really valid exit option for some business owners and now it’s a large part of our business. |
| DT: | Yeah, absolutely. In fact, you’ve written and published a book on the subject. |
| CW: 5:00 | Yeah, correct. I’ve done two things. I’ve published a book for business owners to read on employee share plans. How do they work? What do they look like? What are the rules and regulations because there’s some complexity around both the legal and tax side, but also I think it’s actually more about what you said in the introduction. It’s more about the alignment between owners and employees. How do we get people focused on what we’re trying to do with the business? Thinking and acting like a business owner is a really good outcome. If you can get your employees to think and act like a business owner, you’ll get a better result. They’ll also enjoy it much more. |
| DT: | Absolutely and you hear that all the time in corporate values or in an employee handbook, that we want you to think like an owner of the business, but of course it’s very difficult to incentivise that behavior unless that employee really does think of themselves as a business owner and what better way to do that than giving them a slice of the pie. |
| CW: | By far the best way to get someone to think like an owner is have them become an owner because then literally it’s natural. It’s just what they do. |
| DT: | And as well as the book and the practice, you also have a podcast of your own. |
| CW: 6:00 | Yeah, I do. Well, I’ve got a couple that I’ve done, actually. Mid-Market Matters is a podcast around mid-market size businesses and really I’ve just interviewed a whole stack of network connections and experts. Accountants, lawyers, financial planners, business coaches, IT, marketing. It’s just around really finding out what the mid-market business owners really need to focus on. I think it’s really a largely untapped area of wealth and growth and employment. The mid-market makes up a lot of our economy. |
| DT: | Oh, absolutely. |
| CW: | A lot of people focus on large corporates and listed companies obviously, or very small businesses, and this middle market area, there’s a lot of money there. There’s a lot of wealth tied up in those businesses. |
| DT: | Absolutely. |
| CW: | And a lot of people employed. |
| DT:
7:00 | Absolutely. TIP: Now, mid-market businesses make up a decent chunk of the Australian economy, especially with the amount of tax revenue they contribute. But exactly what a mid-market business is can be difficult to precisely define. But, according to accounting firm BDO, at least, in their 2021 BDO Growth Index report, the Australian middle market includes “organisations with annual turnover between $10 million [to] $1 billion.” Now, that’s a massive range of Australian businesses and this method of defining the mid-market is similar to how the Australian Tax Office defines business size for most purposes by revenue rather than by the number of employees they have, for example. Mid-sized businesses recorded average annual revenues of $351 million with the average profit margin being 5.65%, or just under $20 million before tax. Now, according to another 2018 BDO report, titled Uncovering Australia’s Middle Market, this middle market consisted of about 18,000 registered companies which is only 2% of the total registered companies in Australia, 18% of net tax and 23% of total income for Australia. I think as we see that generational shift from baby boomers and Gen X, who are currently the holders of those valuable assets in the mid-market… |
| CW: | Yep. |
| DT: 8:00 | … there is a kind of unsolved succession problem there as that wealth is transferred to the next generation who maybe don’t have the personal wealth to acquire that in the traditional way. It’s a very interesting problem, I think. |
| CW: | It is. We’re talking about a significant dollar value. Those businesses are worth many billions of dollars when you look at it. Businesses today in Australia that are owned by baby boomers, it’s a substantial asset class and the problem with that private business succession or exit strategy is, it’s not like BHP shares. If I buy BHP at a low price and you buy them at a high price, the wealth transfers between us. You make money and I lose money. In a privately owned company, if you don’t manage the wealth transfer successfully, the wealth actually evaporates. It doesn’t get transferred to anybody. It disappears. So, the focus on getting that part right is actually really important. |
| DT: | Yeah, absolutely. We’ll have to have a conversation about that one day soon but I want to start off with a nice big question. Hopefully this isn’t too much of a big question. What is an ESOP? What is a good one designed to do? |
| CW: 9:00
10:00 | I think the key thing is there’s a lot of technical and tax, but I think that’s largely a distraction. It’s important to get it right and you have to do all of that, but it’s actually about the psychology of employee ownership. So, an ESOP in a simple form, it’s just a legal structure to allow employees to own shares, governed by some rules making sure that the business is protected, the owners are protected, and the employees are protected and also there’s some pretty generous tax concessions and so on, available for employee share plans. So, the rules and the setup all need to cover that. Most importantly though, it’s actually about the structure and the ability for employees to acquire equity. Whether they buy it or earn it or salary, sacrifices, a whole stack of options as to how they can do that, but it’s actually about them becoming an equity owner. So, it’s really about making sure employees understand what they’ve got. In other words, education for employees and I’ve got a couple of hundred of these plans running and they’re running in accounting and law firms where people understand exactly the tax and accounting but I’ve got one in a sheet metal factory. I’ve got one in a printing business where those employees are not sophisticated financially or legally and they’re not supposed to be but they understand through education what it means to own a share in a business that you work for and ultimately that’s what we’re trying to get to, where employees have a much closer alignment with the owners because they own the same shares in the same business and therefore the decisions that the owners make that are good for owners are also good for employees. That alignment can create quite significant changes in behavior. |
| DT: | Absolutely. I want to come onto that in just a moment, but first you mentioned that under an ESOP, employees can buy shares or earn them. Now, I’ve seen in executive incentive programs all kinds of ways that employees can earn into an ESOP, whether that’s by tenure, whether that’s by hitting certain KPIs or targets. There’s a whole different range of ways that those share options can vest. Can you talk me through a couple of the more common ones and why you might pick one over another? |
| CW:
11:00
12:00 | Look, a lot of our plans have multiple different access points or multiple different ways employees can apply for shares and that’s because if you look at a group of 100 employees in any business, you’re going to have people probably from 20 years old to 60 years old. You’re going to have people that have got fairly significant financial resources. If you’re a 60 year old baby boomer with a house in Sydney or Melbourne or something and you’ve been working for 40, 50 years, you’re probably reasonably wealthy but if you’re 20 years old, straight out of uni, you’ve got a HECS debt, you probably can’t write a check for $25,000 to buy shares. So, it’s really important to offer a number of different ways people can enter the employee share plan. So, what we generally cover is 4 or 5 key things. The first simple ones are largely driven by the tax concessions. So, it’s actually possible to give, literally, give or gift employees $1000 of shares per annum, completely tax exempt. So, no tax payable by anybody. It’s literally a gift of $1000 worth of shares. Now, $1000 worth of shares is not a lot. It’s not going to buy, you know, significant percentage of a company but if you do that for 10 years and gradually the share price increases and you’re starting to build an equity stake, it’s more than about getting that person into the plan as a first step because it’s an easy to do first step. Second step then might be to put in place a salary sacrifice option. So, under the rules at the moment, you’re allowed to salary sacrifice $5,000 per person per annum. Now, again, that’s not a massive amount of money, but I look at it, I’ve got staff in my business. I’ve got one of these employee share plans at Succession Plus. I’ve got staff in my business who salary sacrifice $5,000. Now, in their world and the salary that they’re on and what they’re doing, that’s actually a significant financial investment. To me, as the owner that says, that person is locked in. They’re not going anywhere. They like the business, they like working here. The fact that they’re putting some of their salary aside to buy shares in my business is actually quite humbling. |
| DT: | Absolutely. |
| CW:
13:00
14:00
15:00
| And it’s also fantastic for me to know that I’ve got some key people in my business who really love what we do and they’re enjoying it and they like working there and they’re actually investing in it financially. Over and above those, there’s a couple of other ways. Firstly, the obvious one is employees can buy in. So, if an employee has got $20,000 in the bank or 10,000, whatever the number might be, they can literally just use that to buy shares and there’s some rules about how you have to do that. Things like market value and so on but basically they can buy in. TIP: Now, in this situation, Craig is obviously talking about where shares or rights to shares are granted outside of a gift or salary sacrifice. There is an element of difficulty in this, however, as ‘market value’ isn’t defined in the Act and there’s no method for working out market value provided either. However, the ATO provides some guidance on this on its website, explaining that the term should be given its ordinary meaning. The ATO acknowledge that this gives taxpayers an increased flexibility in defining market value, meaning they are able to, and I quote, “choose a valuation methodology that fits their circumstances and has the lowest compliance costs.” The ATO says that it will accept “any reasonable method for determining the market value of listed shares in particular circumstances.” The other way that we use, and we do this a lot with clients, where we’ve got employees who might not be able to write a check to buy in, is we do a profit share type plan. So, what we do is set up a profit share and it might be a profit share that says, “once the company gets to half a million dollars net profit per annum, we’ll share 20% of any amount above that into the employee share plan.” So, I get to the end of the year, and maybe I’ll make $600,000. I’m $100,000 over the half million dollar threshold, 20% of that is $20,000. I put that into the employee share plan. So, the company itself pays $20,000 into the employee share plan. That $20,000 can only be used by the share plan to buy shares for the employees. So, I’ve then got a number of employees that are in the profit share plan. They might have to have been with me for a year or two before they qualify to enter into that but basically that means they don’t have to do anything, other than help me drive the profitability of the business. Now, that’s a real win-win because they’re now focused on profit because it helps them buy shares. I’m already focused on profit because I own the business and I want to drive that, and there’s a real reward for them for discretionary effort. If they’re happy to spend a bit more time working with a client or working on a project, or perhaps focusing on an area of the business they wouldn’t normally be focusing on, like risk management or policies and procedures or doing something extra in terms of client service, then they can see a direct benefit from that because the profit improves. Some of that profit, at least, is used then to buy shares. Importantly, though, that doesn’t rely on their financial position. |
| DT: | Yes. |
| CW: | So, they’re actually in a position where by attending, doing what they do and putting in a little bit of extra effort, aligning with me to drive the profit of that business, they benefit as well. |
| DT: | Now, that discretionary effort that you’re driving with a plan like this, you had an interesting example of what that sense of ownership for the employees can do in your book. Do you want to tell me a little bit about that example? |
| CW:
16:00 | Yeah, look, I’ve got quite a few examples and I mean, one of them is related to my own business where one of my staff is actually good friends with my oldest son, in their mid-twenties, and out socially on the weekend and he comes home and says, “did you know that someone’s talking about the fact they’ve got shares in your company?” And I said, “yeah, they have.” And he said, “yeah, but they’re talking about it at a barbecue.” And I went, “well, that’s fantastic. The girl that works for me is telling people, ‘I’ve got shares in Succession Plus.’” Now, that’s a good thing. What that means is she’s actually actively involved. Now, she hasn’t actually bought those shares. She’s earned them through the profit share plan and $1000 tax free and so on that we just spoke about but she’s now committed and invested. She knows she’s a shareholder and she’s actually telling people outside that, that she’s in the share plan. Now, when I heard that, my son heard it and thought, “oh my God, people shouldn’t be talking about that.” I heard it and thought, “fantastic, how good is that?” And so it’s really about those people being invested and involved, even though they haven’t put money in, in that example with a profit share, they are invested, they are shareholders. They’ve got a certificate that says they are, they know what that means. We share information with them over and above the normal situation but it’s also about encouraging them to think and act like a business owner. |
| DT:
17:00 | Yeah, absolutely. Now, something that’s really striking about the way you’ve described ESOPs, including in your own business, is that I think a lot of our listeners might associate share schemes or employee share option plans with very large companies, publicly listed companies where there’s some marketability for those shares, for example. Thinking about companies like Google or Apple or BHP, we mentioned earlier but what’s striking about some of the examples you’ve given is that many of these plans are being established in SMEs. What are some of the differences between an employee share option plan in a large publicly listed company versus an SME? |
| CW:
18:00 | Yeah and you’re quite right. I mean, most of the large public listed companies have employee incentive plans that include employee ownership. The banks, BHP, all those large companies have got employee incentive plans and they often involve owning shares. There’s two substantial differences. The first one is that small businesses are typically very hard to value and the shares are illiquid. So, in other words, the shares don’t trade on a stock exchange. If you want to buy shares in BHP, we can do it on our mobile phone right now. It’ll take 10 minutes to log in, set it up, you buy shares, you pay for them, it’s all sorted out. You can’t do that in a private company because firstly, the share price is not very clear. It’s not published, it’s not tracked daily. Secondly, there isn’t a marketplace to go and buy and sell shares. So, that’s the first problem with a share plan in a private company is how do you solve that? And so for each of our clients, we do an annual valuation. They’re not valued instantly on the stock exchange like BHP or Macquarie or the banks but you have to then have, “well, what are the shares actually worth?” And there are some tax rules that you have to have in place under market value rules to make sure you’re not selling shares at the wrong price but it’s also about the employees and engagement. You don’t want to be ripping your employees off by charging them too much for your shares, that sort of defeats the whole purpose of it. So, it is about producing some mechanisms where we can try and get the best benefits of employee share plans in listed companies, into a privately owned business. So, there’s some rules and compliance around A, valuation, B, around disclosure. So, if people are going to buy shares they need to get enough information to make the right decision, and there’s some rules around that, but ultimately what we’re trying to do is the same thing as the large listed company – allow employees to buy equity in the business they work for. |
| DT: 19:00 | It sounds like then that for an employee who holds shares under an ESOP in a small to medium enterprise, the financial benefit for them is really in the dividends that are paid on those shares rather than say the capital value of those shares. They’re not selling those on the stock exchange when those shares increase in value because there’s no market to do that. It’s a form of income, the dividends paid on their shares? |
| CW: | Yeah, I think there’s both actually. So, dividends are certainly of interest to employees. So, as they acquire more shares and as the company is profitable and pays a dividend, they get the dividend, which for most employees is a pretty significant bonus. If you look at it that way, you’re saying, “okay, now I’m earning extra income because I own the shares.” And that’s definitely a large benefit. The other side of it is, yeah, there’s not a liquid market on it, but the underlying capital value of those shares should change over time and, in fact, a lot of private companies actually grow faster than large corporates. |
| DT: | Yeah. |
| CW: 20:00 | And they can move more quickly. You look at things at the moment with FinTech and software as a service and so on. Some of those businesses double and triple in value in 3 to 5 years. So, it is possible that the employee can actually have a significant capital gain. The interesting thing is, whilst it’s not a liquid market and you can’t sell them like you can buy and sell BHP shares, the employee share plan itself has a succession strategy inside it. So, if you look at a business with 100 people, as I said before, you’re going to have people that are 20 years old, but also people that are 60. Now, as those 60 year olds retire, in most of our plans, they’re not allowed to keep the shares after they exit. |
| DT: | I was just about to ask you what happens when the employee leaves the company. |
| CW:
21:00
22:00 | We only want the employees that are still working there to hold the shares. What that means is when you’re 65 and you retire, or whatever age it is, you’ve also got some younger people then saying, “well, that person’s retired, there’s more shares available. I might buy some.” Or as they get promoted or advanced in the company, they’ve got the ability to earn more shares through the profit share. So, it’s got its own succession structure internally. Coming back to your question about what happens when employees exit, I think most of our plans, I would say 99% of them, don’t allow employees to take the shares with them. Generally speaking, if somebody leaves, an accounting firm, they’re going to go and work for another accountant or if they leave a law firm, they’re probably going to go and practice law, either on their own or with somebody else and you don’t want them to own shares in your business when they do that for obvious reasons. So, our plan generally disqualifies them, basically a compulsory redemption of those shares, so they can’t take them with them. What we do then is look at that person and say, “okay, we’ve got a couple of rules in place here again.” The first one is, are they good leaver or bad leaver? So, we normally have a bad leaver clause in there. For example, if somebody leaves and within three months goes and starts up a law firm down the road and starts ringing your clients, they would automatically become a bad leaver and under that rule, they would typically get nothing. So, the whole value of their share plan is zero. If they’re a good leaver, and most people are, let’s face it, a good leaver, then what we typically do is discount the value of their shares based on time. So, if you earn $10,000 worth of shares this year and you leave next year, most of our plans have a significant discount. It might be 80 or 90% in the first year. It might be 60 or 70 in year 2 and gradually it’ll get down to where it’s zero but that might take 5, 7, or even 10 years to get to the full value. So, it’s a reverse. It’s a penalty. We tell employees about it upfront so they know the earlier you leave, the less you’re going to actually get. We talked to a client just this week about using that. He’s got some turnover of, as we all have, employees at the moment in a tight labour market. He actually sat down very successfully in an exit interview and said to that person, “do you know if you leave today, you are leaving $38,000 worth of shares on the table. If you stay with us for another 3 to 5 years, you’ll actually get that.” Now, $38,000 is a reasonable amount of money for most people. |
| DT: | Yeah. |
| CW: | That actual interview turned around into, “okay, what do you need to stay to keep the $38,000? What else is going on?” Because people don’t generally leave because of the share plan. They might leave because of their manager, or they’re not paid enough, or they’re not happy with the type of work they’re doing. So, he actually used the share plan to turn that exit interview into a stay with me interview and how do we make things work together to keep the $38,000, which was a really cool example of a good way to use an employee share plan. |
| DT: 23:00 | Yeah, that’s fantastic. I mean, I think when we talk about the attraction and retention benefits of an ESOP, we’re usually just thinking about the fact of ownership at all but, in fact, the design of the plan in terms of that temporal discount on employee exit, that can also offer those retention benefits. Now, there’s a model promulgated by the ATO for employee share option schemes that offers some tax relief for employees but it requires ESOPs to be set up in a particular way. Can you tell us a little bit about that ATO scheme? |
| CW:
24:00
25:00
26:00 | Yeah, so there’s a couple of different schemes that the ATO promote, and clearly I don’t. encourage people to use ATO generated documents because I don’t think they’ve got the rules designed the way that it works the best, but it does meet the tax concessions. TIP: Now, to find these standard ESOP documents provided by the ATO, their website is once again where you should be headed – navigate to Employee Share Schemes > In detail > ESS – Standard documents for the start-up concession. They’re a good starting point to give you an idea about the requirements for the tax concession and how to meet them. We’ll also leave a link to all of those documents in the show notes for this episode. Now, having said that, we design plans all the time that meet the tax concessions. You don’t need the ATO documents to do that, but the underlying model, there’s really two key tax concessions that the ATO use and promote. This is not some dodgy tax scheme. These have been promoted by the government as legislation to encourage employee share plans. So, the first one was brought in 2015 by the Turnbull government, and they’re called basically ESS startup rules and the name’s a little bit misleading because it’s supposed to cover startups, but startups are actually quite broadly defined. So, under that legislation startups can actually be turning over up to $50 million. They could have been in business for up to 10 years. They can’t be listed, and they must be an Australian resident company. Now, if you think about business owners out there widely, there’s a lot of fairly substantial businesses that turn over 20, 30, 40 million that still would qualify, that have been around for 5 or 7 years, so less than 10. I wouldn’t call them a startup, but they’re covered under this legislation. Now, the reason that’s quite useful is if you use those particular startup rules and you design your plan as a startup plan, there’s no tax for employees until they get to the point of exiting and then it’s capital gains tax. So, that’s probably the most generous tax treatment. There’s no upfront tax either on the shares or if you’re using options, there’s no upfront tax. So, that’s quite attractive for most employees because they can get the shares. There’s no taxation upfront. 10 years on the company gets sold, or they retire and then they sell their shares, then they pay the tax on that gain and it’s CGT, not income tax, so that’s quite attractive for most people. The other kind of plan that the ATO promotes and uses a lot and is quite common, and a lot of our plans are based on that. Under what’s called Division 83A, there’s deferred tax plans. Now, it’s not as good as the startup rules, but if you qualify for those plans and they’re fairly easy to qualify for what that means is that employees are taxed on the shares that they get, but it’s deferred tax and it can be deferred for up to 15 years – 15 years is the maximum. So, in most of the plans that we do, let’s say an employee earns $10,000 worth of shares through our profit share plan, they actually get taxed on that $10,000 but they can defer it and as I said, they can defer it for up to 15 years. So, that means that the first time they’ll be taxed on those shares is probably one of, either the company gets sold and the shares therefore get sold and they get their money and they pay tax on it, they leave the employment most of our plans have a clause in there that you can’t take the shares with you, as I said before. Therefore, they exercise the shares and they get taxed at that point or 15 years, which is the longest you can possibly defer it. Now, 15 years is a long time to defer tax. It’s a pretty generous concession. |
| DT: | Absolutely. |
| CW: | And so a lot of our plans are what’s called deferred tax plans, where the employees can earn the shares. Now, they get taxed on it, but they defer it, and most of them defer it for the full 15 years depending on how you write the rules. |
| DT: | And of course, that deferral is important for an employee in a small business. I’m thinking about the printing company that you described. If you do have a young employee who maybe doesn’t have a great deal of personal wealth at the moment, that upfront tax bill when there’s no cash to pay it… |
| CW: | Absolutely. |
| DT: | … would be a real pain. |
| CW: 27:00 | Under the old rules, before these rules were introduced in 2015, that was one of the major reasons people didn’t introduce employee share plans because people were getting a tax bill with no cash to pay it. They own the shares, but you can’t pay a tax bill with shares. |
| DT: | That’s right. |
| CW:
28:00
29:00 | So, they have to have the cash to do it and that’s one of the reasons before these changes that a lot of employee share plans didn’t proceed and so the changes that came in 2015 were pretty generous. There’s been 3 or 4 different changes since then, by both sides of politics. The most recent governments, Morrison and before that Abbott and before that Rudd as well, all introduced slight tweaks and changes to the employees share plan rules but they’re all in favour of employee share plans. So, the tweaks and changes are all designed to improve the way that we can use employee share plans, some of the tax concessions, some of the disclosure rules, etc. TIP: In March 2022, Josh Frydenburg handed down the Coalition’s last Federal Budget before the election. This budget included changes to the regulations of Employee Share Plans and those amendments were intended to simplify the regulatory regime that applied to ESOP offers. Now, before the Budget, ASIC Class Order CO 14/1001 indicated that unlisted bodies and their wholly owned subsidiaries were exempt from disclosure rules for employee incentive scheme offers, provided that those offers were limited to $5,000 in value per participant in any 12 month period. The Federal Budget proposed that this limit would be lifted to $30,000 per employee per year, up from $5,000, but at least for now, the class order remains in effect at that $5,000 limit. However, another change proposed in the Coalition’s last Federal Budget has taken effect. As we mentioned earlier, tax-deferred employee share option plans allow the employee to defer the payment of tax on the issue of the shares to the earliest deferred taxing point, for example, when the employee ceases their employment with the company, or when there is no risk of forfeiture or restriction on the disposal of the shares or options, or 15 years, whichever is earliest. The Corporate Collective Investment Vehicle Framework and Other Measures Act 2022 (Cth) – bit of a mouthful – has removed the cessation of employment deferred taxing point. What does that mean? Well, it allows the holders of employee share option plan interests to defer their tax bill for a bit longer, until the next deferred taxing point, what will normally be the deferred taxing point of when there’s no risk of forfeiture or restriction on disposal of the shares or options. We’re not quite as good as the US. So, the US has some very generous laws in terms of employee share plans, which we’re not quite there yet but we are working and lobbying with government to try and get some of those changes brought in to make them more attractive. |
| DT: | And it does sound like there’s a bipartisan alignment… |
| CW: | There is. |
| DT: | … on the policy. |
| CW: | And there has been for probably 20 years. As long ago as 2002, back then there was a big inquiry into employee share plans and both sides of politics openly supported them. Some slight differences in how they interpret them and what the rules are, but yeah, there is bipartisan support, which is really good. |
| DT: | Now, you mentioned that most of the plans that you’re putting together either fall under that ESS tax concession or the deferred tax concession and to qualify for those concessions, the plans have to have certain features… |
| CW: | Yep. |
| DT: 30:00 | … like the way the shares are valued, for example. And there also has to be some level of buy-in upfront, doesn’t there? The employee notionally has to pay a price for the shares. Is there ever a situation where you design an ESOP that doesn’t fall within those concessions? |
| CW:
31:00 | Yeah, there are a couple of examples where we’ve used plans or where clients have already had a plan and we’ve just modified the way that they work or the rules or broadened them to qualify more people. And so, yeah, there are some specific circumstances where you might need to have a plan where there are very few, if any, tax concessions available. The plans still work. You can’t really design an ESOP or any other strategy based on tax. I’ve always said to clients “don’t design strategy based on tax.” Certainly try and minimise it and try and make sure you use these types of concessions where they’re available, but the plan still works, you know. You can still have a plan that attracts and retains employees. They still get the benefit of the growth in value in shares. Yeah, they’ll pay tax on it, but they’ll pay tax if they buy shares in Westpac Bank tomorrow as well. There’s a parity there and I think we are able, for, I would say, 99 out of 100 clients, to work within the tax concessions to get them some level of tax benefit on the plan. |
| DT: | I think sometimes you hear about non-tax concession compliant plans that involve the employee not paying anything upfront and just earning in whether that’s from serving a certain tenure with the organisation… |
| CW: | Yep. |
| DT: | … or hitting certain KPIs but, again, recognising that tax concessions aren’t the purpose of the plan, they’re just a side feature. That often doesn’t necessarily work out well for the employee. Does it? Because by not paying anything for the shares upfront, they end up getting quite a big CGT bill at the end. |
| CW:
32:00 | Yeah, they can at the end. Some of our plans, I’ve designed a particular employee share plan structure called a Peak Performance Trust, and that actually has the ability for employees to never have to buy shares. They can all earn them. Now, they might salary sacrifice, they might get the $1000, but they can earn them through a profit share plan. In effect, what that does, we still use the deferred tax plan rules in that plan, but what we’ve actually got is 100% discount. So, in other words, the employee is earning the shares through a profit share plan. They’re not physically paying for them in any way, therefore they’re getting the shares at 100% discount. Now, that 100% discount is taxed, but it’s deferred tax. So, what we’re relying on is you’ll pay the tax in 15 years time, you can’t avoid that, obviously, but what you’re relying on is that the shares you got today for $10,000 in 15 years time will hopefully be worth $20,000 or whatever the number might be and yes, you’ll pay tax on that amount, but you’ve still got a fairly significant benefit. You’ve got the dividends all the way through, if there are dividends, and you’ve got the capital gain on the share. So, you can design those plans to still take advantage of the tax deferrals as long as you’ve got certain rules in place. For example, for a tax deferred plan, you have to have a level of what they call ‘risk of forfeiture’. So, some of those shares or all of those shares, or a percentage of the value of those shares must always be at risk. Now, at risk is simply, if you leave, you can’t take the shares with you or if you leave in the first 5 years, you get zero or whatever it might be. |
| DT: | Some condition on which they’re redeemed. |
| CW: 33:00 | Some condition and it’s got to be a real risk. Legislation talks about a real risk of forfeiture, not some dummy clause that says you could lose them if I decide I don’t like you anymore, it’s got to be a real risk and as long as you’ve got that in, then the tax deferral can apply. So, you can set up plans where people don’t have to put money in upfront. They can gradually earn that through a profit share and it’s deferred tax. |
| DT: | Now, it sounds like although there’s some best practice models for ESOPs, we’ve talked about some of those, in particular, the ones that qualify for the ESS and deferred tax concessions. It does sound like you really designed them for the business that they are bespoke usually. |
| CW:
34:00
35:00 | Absolutely. I think one of the key things is to really align any incentive plan, even if it’s a profit share or a bonus scheme, with a real business outcome. So, owners come to us and employees come to us and say, “I’ve got a problem with attracting and retaining staff.” There’s certain rules we use in that situation that will work to attract and retain staff. TIP: The struggle to attract and retain staff has defined 2022 for a lot of businesses and industries, and the law is no exception. According to the 2022 Tech & the Law report published by Thomson Reuters, the third largest focus in 2023 for private practice firms will be attracting, retaining or upskilling talent, with just under half of all firms expressing their priorities in that way. In-house legal teams aren’t feeling that pressure quite as strongly – only 28% of companies said that it was one of the biggest challenges facing their legal department but, on the other hand, 28% is nothing to sneeze at either. Now, if you’re interested in learning more about this attraction and retention challenge, on episode 67 of Hearsay I talked with David Bushby, the managing director of InCounsel, about this issue and he told me about some ways that law firms can utilise legal technology to help them attract and retain their talent. Others, that’s not an issue. I’ve got a very large client based in Newcastle, but they now operate nationally whose entire succession strategy is to sell the business to the employees through their employee share plan. So, we set that plan up about 5 years ago. There’s about 200 people working that business. Roughly 50% of them are now in the employee share plan. So, it’s quite a large plan and those 100 roughly people own about 40% of that business. |
| DT: | Wow. |
| CW: | So, over the last 5 years, they’ve gradually been buying shares from the founder. So, the founder’s exit strategy is to gradually sell down over roughly 10 years it’ll take, might be 8, might be 12, but roughly 10 years and so that owner is just gradually selling equity down into the employee share plan. What happens then is, you imagine if you’ve got 100 people out of 200 that own shares in your business, A, they’re more likely to stay, B, they’re certainly engaged and involved. Not that they weren’t engaged and involved before, but there’s a next level. It really is the embodiment of thinking and acting like a business owner… |
| DT: | Yeah. |
| CW: | … because they’re owners and there’s 100 of them. There’s not 1 or 2, there’s 100. So, you can see quite noticeably the change in behavior and approach and attitude from employees that are in that plan. |
| DT: 36:00 | Absolutely and that example is such a far cry from the way we thought about shares as remuneration 20 or even 30 years ago. It’s really not the province of senior executives holding a small number of shares. That half the workforce holding nearly half the shares in the company is a remarkably democratised approach to running a small business. |
| CW:
37:00 | It’s huge. That’s been a very successful example. I think you need an owner that has that approach and attitude and that company’s very successful. They make good money. It’s a very valuable business. So, over time, quite a lot of those employees will end up being quite wealthy in terms of the shares that they own in that company. Now, if somebody’s been working there, they’ve got people that have been working there for 20 years and more. If you go further down the track, another 10 years time when they own that business outright, the founder’s pleasantly retired and sitting at home relaxing or doing whatever they’re going to do, that business is quite substantially valuable and those employees will all have a share of it. Now, there’s 100 of them, so when you do the maths no one’s going to own 10 or 20%. They’ll all own very small percentages, but they own a small piece of a very large pie. They’re in control of it. They know what it is. They’re very comfortable and familiar with it having been working there for a long time and that really is a really good example of how that plan will work. The capital value of that company will then sit with employees. When they pay a dividend, that’ll be shared amongst half or more by that time of their workforce. It’s a really interesting example of how these plans can actually be designed to achieve an outcome. In that case, it was a succession and exit strategy, not retention and attraction. |
| DT: | Just thinking about what we discussed at the top of the episode, this challenge of transferring wealth from the baby boomer generation down to generations that don’t have the same personal wealth. That’s a novel solution. |
| CW: | I know the founder very well. I think, in 10, 15 years time, she will sit back very proudly and look at 100 or more people who have now got a very substantial contribution to their family’s wealth or personal financial situation. I mean, what a great legacy to leave. know, Not only is it a great business and it’s doing great things in the world and all that sort of stuff, what a legacy to be able to leave – wealth with 100 different people. |
| DT: 38:00 | Yeah. That’s fantastic. Now, you said that ESOPs can achieve all these different goals. They can achieve an exit or a succession goal, an attraction and retention goal, or even a performance goal. |
| CW: | Yep. |
| DT: | Maybe let’s work with an example. If I came to you and I said, “I’m not worried about attraction and retention. I’ve got great people and I can keep them, but I’m worried about performance. I want my ESOP to drive performance.” How would you design that plan differently to a plan that was really optimised for attracting and retaining staff? |
| CW: | Yeah. So, we’ve got some of the same rules, but where we can make some substantial difference is to look at what the key performance metric we’re trying to drive. So, I’ll give you some examples. We’ve done some work with a mining services company who had a problem with safety actually. |
| DT: | Yeah. Right. |
| CW:
39:00 | Well, two problems. One was safety. They had a lot of incidents and employees were a bit blasé around all of that, which is a bit surprising but that’s what they were and so one of the metrics we put in the way that employees could earn shares in that employee share plan was a metric around hours lost due to safety issues. Now, suddenly the hours lost due to safety issues rapidly declined. |
| DT: | I bet. |
| CW: | And because employees know and understand, not about safety, interestingly, financially they knew that cost them money. If there was a safety incident, it cost them money and it jeopardised the amount they could get in their employee share plan. Now, that’s a very blunt instrument to use, but it worked in that example. In other examples, it might well be a profitability target, it might well be billable percentage in a professional services firm where we just include that metric in the way employees can earn shares. So, not just profit, but other KPIs. |
| DT: | And that example of safety as a metric for that mining services company suggests to me that the possibilities for the kind of metrics you can include in a plan like that are really endless. |
| CW:
40:00 | You can do almost anything without being ridiculous. You can include in the plan, in the earning model, in the structure, you can include anything. Some examples of that might be we’ve done some work with a financial planning firm that basically, employees can earn shares based on the value of the book of clients that they’re managing. So, if it grows year on year, they will earn more shares than a portfolio that declines, is one example. We’ve got an insurance broking firm that uses a net promoter score, so client surveys, and employees that get a higher mark on their net promoter score than the person sitting next to them earn more shares. |
| DT: | Wow. |
| CW: | What a great example. That’s a really clear and easy way to say, well, “this person got 95, you only got 85, therefore they’ve got more shares than you.“ |
| DT: | What’s great about that is that the metrics used to measure performance don’t have to change for the plan. |
| CW: | Correct. |
| DT: | You can use the metrics that as a business owner, you’ve decided are the best way to measure success. |
| CW: | Correct. So, some of the plans that have worked really well, we’ve got another one in a real estate firm, an LJ Hooker office where they had an issue with sick days. We just included that in the plan metrics and straight away the sick days go down. |
| DT: | That’s amazing. |
| CW: 41:00 | It’s a blunt instrument because it’s very direct but I think that’s why it works. People understand the size of the book that I’m managing, if it grows, I get more shares. Net promoter score, if I get a better customer service score, I get more shares. Now, that’s a great business outcome for the business as well. If every employee is focused on the net promoter score, generally as a business, your net promoter score’s going to go up, which is a good thing. |
| DT: | Yeah, absolutely. It’s interesting, we often talk about wanting our employees to be internally motivated rather than externally motivated and I think we think about the ESOP at the most basic level as a way to engender internal motivation, that if you’re a business owner, you care about the success of the business because you own it but those ways of tweaking the plan to match those incentives combine external and internal motivation, don’t they? Because you care about safety, you care about customer service, you care about the growth of the business because you own it, but there’s also a direct relationship. |
| CW: | Correct. One of the problems is I don’t think there’s many employees that get up in the morning and come to work thinking, “what can I make a mess of today?“ |
| DT: | No. |
| CW: 42:00 | “What can I bugger up?” No one thinks like that, but I think it’s very difficult sometimes for employees to know and understand what it actually is that drives performance. You take any of those examples with a net promoter score or the client book or whatever it is, I think it’s really tangible and easy for employees to deliver on that. If you go and say to employees, we need to increase our profit by 5%. They’re all going to walk out of the room going, “okay, what do I actually do that will contribute to that 5% increase?“ |
| DT: | Yeah. |
| CW: | And so when you make it really tangible, get your net promoter score from 85 to 95. I can do that. Build your client base from 1 million to 1.1 million. It’s really tangible and it means then employees can just focus on that key outcome that we are looking for as a business. Profit will ultimately improve because of those things. |
| DT: | So, we are convinced. We think these sound like an excellent idea – employee share option plans. Prosaically, what are the sorts of documents and procedures that we have to go through to implement an ESOP in our business? |
| CW:
43:00
44:00 | So, the first thing we do with clients is do what we call a business insights report, which is a pretty comprehensive review of the business. It includes a valuation or an estimate of value to know what is the business worth? Therefore, what are we selling the shares for and so on. Secondly, we look at the structure. Who owns the shares? Is it in a trust? Is it in a company? Does the structure actually suit the employee share plan rules? Sometimes we’ve got to do other things to make that work and then it’s really about then just sitting down with the business owner to understand what their outcomes are. So, assuming we’ve got a valuation and we’ve got a structure that we can put an employee share plan in and it’s going to work, then okay, what are we trying to achieve? What are our KPIs? What’s the outcome? If I’m a genius and I can build the best plan in the world, what does it look like? What does success look like in 5 years time? What outcome do you get from having a plan? Then we can design the plan rules. So, in our plans, there’s normally this business insights report valuation. There’s then a set of plan rules. Now, that could be a trust deed, if we’re using that peak performance trust, that might be a trust deed. We normally set up a corporate trustee but we also have to make sure we’ve got the employees on board. So, you can’t give employees a 50 page trust deed and go, “there’s the plan rules,” because it’s legal gibberish for most employees. What we write then is an employee manual, which is a plain English guide, basically breaks down the trust deed, here’s the rules you need to know. How do you enter? How do you exit? How do we value the company? What happens when we pay dividends? What are franking credits? How does that work? So, it’s all broken down in an employee manual and then ultimately one of the things we’ve done over the last 12 months is actually introduce our own employee share plan administration software with a view, not so much to compete with Computershare and Link and Boardroom, and all those people that provide registry type services for listed companies, this is specifically targeted at SMEs and one of the things that it does really well is educate and inform employees about what they’ve got. One of the risks with employee share plans is it gets put in the same market as superannuation. If you’re a 25 year old and you’ve got money in super, you don’t really care. You know it’s there. |
| DT: | Yeah and you might have 3 or 4 superannuations. |
| CW:
45:00
46:00
47:00
48:00 | You’ve probably got 2 or 3 funds. You’ve got money over there and if you ask someone exactly how much have you got in super, they’ll go, “oh, I don’t know. It’s about 20 grand, I think.” They’re not sure where it is. They’re not sure what it’s invested in because it’s so far down the track for them, they forget it. Now, we don’t want people to treat employee share plans like that. So, we’ve got a mobile app with push notifications. So, for example, we’re paying a dividend. We let all the employees know, you will get a dividend of $250 in your bank account on Friday and here’s why. It’s your part of the profit share. We’ve just revalued the company and it’s gone from $8 million last year to 8.6 this year. So, the employees get those kind of notifications. They can log in, they can see their shareholding. That’s actually quite motivational for people to see and understand. So, part of the plan is all the setup and the legal documents that you need. The main part of it then is valuing the company every year so we can track performance and not only do we value it and say, “it’s worth 8.6 million, but here’s what you could or should do to make it worth 9. Here’s the key things that drove your value,” and that might be there’s high risk in your business or it’s still key person dependent on the founder. So, fix that and then your evaluation will jump up even more. So, it’s a real ongoing sort of management admin. The admin and compliance stuff has to be done. So, you’ve got to lodge things called ESS tax statements every year, a bit like the old group certificate, which basically talks about the earnings from the employee share plan for each employee. Obviously dividend statements got to be included on tax returns, so those sorts of things are all included in that admin function and yes, it’s admin and compliance and it’s got to be done. I see that as like a foundational thing. You got to have it, but really it’s about keeping the employee engaged and informed about the shares they’ve got, what they’re worth, how they are benefiting it. Ultimately, everybody wants to know what’s in it for me and what’s in it for them is the increase in the share price and any dividends or income they’re earning. TIP: Now, if you have an employee incentive scheme in place in your organisation, you have certain reporting obligations that you have to comply with. This is going to be a longer explanation, so strap yourself in. Firstly, if an employee has received an interest from a scheme that year or they’ve reached a deferred taxing point, as we discussed earlier, as a result of using the deferred tax option then you must provide them with what’s called ‘a scheme statement’ before the 14th of July as they’ll require it for their tax return. You can download the statement form on the ATO website and that statement has to include at least the following details: ● The discount for interests acquired under each type of taxed-upfront scheme ● The discount for interests acquired under a tax-deferred scheme if a taxing point happened during the financial year ● The discount for shares and rights, or options in other words, acquired before the 1st of July, 2009 if a cessation time occurred during the financial year ● And the total amount withheld from discounts during the financial year. If you’re utilising the startup tax concession then you’ll also need to tell your employee the: ● The number of interests acquired ● The market value of those interests ● The acquisition price of interests that are shares and the exercise price of interests that are options ● And the acquisition date of the interests, shares or options. You’re also required to report to the ATO on these things. Employee incentive scheme annual reports are only accepted electronically and are due by 14th of August every year. The annual report will include the following information for each employee participating in an employee incentive scheme and for each scheme that the employee participating in: ● A plan identifier ● The acquisition date for the interests, shares or options ● The plan date ● And the amounts withheld from discounts on scheme interests There can also be other reporting requirements depending on the tax concession that the scheme falls under. Was that clear as mud? You can find out more info about all these reporting requirements again on the ATO website, they have some good guidance there, by navigating to Employee share schemes > In detail > Employer reporting requirements > ESS – Reporting requirements for employers. |
| DT:
49:00 | Throughout this conversation we’ve had about ESOPs, it really occurs to me that the ESOP can be the connective tissue between all of these other great tools for running a business and motivating employees. The sharing of information about the performance of the business and where it’s headed in its strategic direction and the goals that the business is trying to achieve over the next 5 years, that’s important to employee motivation. It’s important that they have that visibility and communicating that through the lens of, well, this is what it means for the value of your shares is a powerful way to do that in the same way that tying the share options that are issued to employees, to those key performance indicators is a good way of aligning performance to the most important metrics. It sounds like an ESOP can be a way to implement a whole bunch of different strategies for attracting and retaining employees and improving employee motivation just through that lens of ownership. |
| CW:
50:00 | Yeah, I think that’s one of the biggest benefits. It’s great to have an employee share plan and employees making money financially and so on. That’s all great, but I do think there’s an opportunity to use them as a real powerful tool within the business to drive performance and engagement and motivation and reward. We’ve got one client that’s been using the employee share plan as an active, I’d almost say aggressive, strategy to recruit people. They’re recruiting, at the moment, a management accountant, right? So are 400 other companies, right? So, when you look through LinkedIn ads or you look on Seek or whatever, you see all these ads, “management accountant, blah, blah, blah.” They’re all the same, right? But what their ad says is not just income, equity as well. Straight away, any management account reading, all these ads are all the same will look at that one and go, “hang on…“ |
| DT: | It’s a differentiating factor. |
| CW:
51:00 | “Tell me a bit more about that. That’s a bit interesting.” So, they’re actually using it quite aggressively, which is your point – use them throughout the business wherever you can. We own a license from an American group called Certified EO, which stands for Certified Employee Owned. Now, we’ve got an architecture firm here in Sydney. They’ve signed up as a member of Certified Employee Owned. It’s like a trademark. So, if you think back to the old boxing kangaroo with the Australian made tick, all that sort of stuff where people actually actively bought a product because it was made in Australia versus made in Taiwan or Britain or whatever it might be, this is exactly the same. So, what it’s certifying is that this company is at least partly employee owned. The guy that founded it in the United States, a guy called Thomas Dudley, actually did a PhD paper and researched the impact of employee ownership on consumers. This is really out there research, but it was fascinating. What it found was that, this is in America but it’s the same here, Mum and Dad consumers are happier to buy from an employee owned company than a big corporate because they know they’re benefiting the employees… |
| DT: | Huh? |
| CW: | … more than the big corporate. Secondly, most of them said they’d be happy to pay a premium… |
| DT: | Wow. |
| CW:
52:00 | … to buy the same product from an employee owned company. So, this guy did all this PhD research, which was fantastic, but then he started this movement. It’s a sort of association of employee owned companies. Now, in the States, there’s thousands of people that are members of it. So, you can actually go into a supermarket or buy beer from a brewery, and it’s actually got a stamp on the bottle that says Certified Employee Owned, which then affects consumer behaviour. Now, that’s a really different way to use an employee share plan. Now, that’s not the normal thing that people think about. TIP: By the way, we’ll leave a link to Thomas Dudley’s report in the show notes for this episode. We’re starting to introduce that to our clients, and as I said, the architecture firm in Sydney, it’s in their media, it’s on their website. They talk about it all the time and their clients are now starting to notice. If you think about it from a customer perspective. Think about where you buy your groceries or where you buy whatever. You suddenly think, “geez, that’s employee owned. The people that work there, the people that make that widget or deliver it in the truck or serve me at the counter, actually own part of that business. I’m pretty confident they’re going to look after me better than the guy down the road who doesn’t own the business.“ |
| DT: | Yeah. |
| CW: | “He’s just an employee.“ |
| DT: | That’s a great point. That it’s not just, “oh, I want to support this business because it’s employee owned and I want to support the underdog, or I want to support ordinary people. It’s also that I think I might get better service.“ |
| CW: | Absolutely, which is really fascinating. I mean, that was the guts of his research was to look at the effect of employee ownership on consumer behaviour and so now companies are using that to market themselves. It’s actually a marketing strategy. So, no one talks about an employee share plan being a marketing strategy… |
| DT: | No. |
| CW: | … but that’s what they’re doing and it’s working really well. |
| DT: 53:00 | Now, that’s what I mean about it being this connective tissue in the sense that without an employee share plan, you can still pay bonuses contingent on meeting certain metrics or hitting certain KPIs and you can still share lots of information about the performance of the business with your employees and you can still engender great customer service by training and cultural artifacts and things like that but it’s the ESOP that sounds like it’s able to do so many of these things as one cohesive tool. It’s a lens through which you can focus on all of these different aspects of your business. |
| CW: | Absolutely. I presented at a conference yesterday and a lady called Vanessa Porter, who’s absolutely brilliant, spoke about culture in business, and my presentation was all about employee share plans and remuneration models and when I listened to her straight away, I stood up and said “this is actually about culture as well. The way that you pay your people, the way that they’re encouraged to become employee owners, it’s a cultural change as much as it is financial and tax and accounting and legal documents, they’re all there but the cultural change that this can encourage and make happen is substantial.“ |
| DT: | Yeah, absolutely. Now, we’ve been talking about SMEs, we’ve been talking about really private companies limited by shares throughout this interview, haven’t we? |
| CW: | Yep. |
| DT: 54:00 | And although incorporated legal practices are increasingly common in New South Wales and in Australia, there’s probably a lot of our listeners who work in partnerships, so unincorporated practices. Are they shut out from employee share option plans? What can they do that’s analogous to an employee share option plan in an unincorporated structure? |
| CW: | Yeah. I think where you’ve got a partnership or unincorporated structure, the same as if you’ve got a trading trust, family trust is actually trading a business. You can’t sell equity in a family trust, right? The same as the partnership model is different. I have got one firm where they bought in as an equity partner, the employee share plan. |
| DT: | There you go. |
| CW: | A fair bit of working around to get to that and sometimes that precludes them from taking advantage of all the tax concessions… |
| DT: | Yeah. |
| CW:
55:00 | … but you can still do it. So, it’s a matter of just thinking, “okay, well I won’t get the tax concessions, but I could have an employee share plan.” If there’s a four partner law firm, the fifth partner could become the employee share plan. So, it’s literally a partnership that now includes a structure that has the employees in it, so they’re then joining as an equity partner in the firm. That can work quite well. It probably won’t give you access to the tax concessions depending on how you do it, but the plans still work. As I said before, you don’t need the tax concessions to make the plan work. If you’re in an unincorporated structure, you probably won’t get them. So, that’s okay because law firms like any other business that’s heavily reliant on key people, you should be trying to lock them in somehow and this is a great way to do it. It just needs a bit more fine tuning in a law firm to make it work. |
| DT: | Yeah, absolutely. So, it sounds like it’s possible to do in an incorporated structure, but probably also another reason for lawyers to start thinking about… |
| CW: | Absolutely. |
| DT: | … incorporating their structure. |
| CW: | I would be saying to that law firm, “if you don’t incorporate and you want to bring in a share plan, maybe it’s a good time to incorporate it as well for all the other benefits and all the other issues that you resolve, but as well, it’ll help you access the employee share plan rules.“ |
| DT: | Absolutely. Well, we’re nearly out of time today, Craig, but if any of our listeners want to learn more about ESOPs, other than reading your book and listening to your podcast… |
| CW: | Yeah. |
| DT: | … where could they go for more information? |
| CW: 56:00 | There’s a stack of information on our website, so it’s just www.succession.plus and there’s white papers. I’ll put this podcast link on it so they can come and listen to this sort of stuff but there’s videos, there’s interviews with clients that have got existing employee share plans. So, I think the first step is just find out more about it. Go and read. Read the blog articles, look at the videos, listen to the podcast, get clear on what you’re trying to do with it, and then obviously I’m happy to sit down and talk to people and find out if it’s appropriate for them and how it might help. |
| DT: | Absolutely. Well, Craig, thanks so much for joining me today on Hearsay. |
| CW: | Pleasure. |
| Ross Davis:
57:00 | As always, you’ve been listening to Hearsay the Legal Podcast. I’d like to thank our guest today, Craig West from Succession Plus. Craig will be back very shortly on the topic of succession planning. If you listened to this episode because you’re interested in updating the way you practice law, then why not check out episode 65 with Demetrio Zema, the founder of Law Squared. He discusses NewLaw, and the way to structure your firm to get the most from your employees and for your clients. Alternatively, if you want to know some other ways to engage your employees, check out episode 31 with Breda Diamond. If you’re an Australian legal practitioner, you can claim one Continuing Professional Development point for listening to this episode. As you well know, whether an activity entitles you to claim a CPD unit is self-assessed but we suggest this episode entitles you to claim a practice management and business skills point. Hearsay the Legal Podcast is brought to you by Lext Australia, a legal innovation company that makes the law easier to access and easier to practice and that includes your CPD. Finally, I’d like to ask you a favour. If you like Hearsay the Legal Podcast, please leave us a Google review. It helps other listeners to find us, and that means we can continue creating the great content that you love. Thanks for listening and we’ll see you on the next episode of Hearsay. |
You must be a subscriber to access this content.