Steps for good share scheme
GET PROFESSIONAL ADVICE Act stipulates that all employees must have full information about the business.
An employee share scheme (ESS) is a fantastic incentive and governance tool that acknowledges the worth of your employees. But implementing one is not as simple as one might assume. What steps must you take to get the ball rolling?
The first step is to get professional advice. ESSs can be a legal and administrative headache which you shouldn’t underestimate and obtaining the services of professionals is prudent.
Take tax for an example: capital gains from dividend payouts must be considered, among other things, because you do not want Sars to accuse you of using your ESS to avoid certain taxes.
Remember, PAYE still applies because even though your employees are shareholders they still receive a salary which is income tax deductible.
Another key legal and administrative area is the Companies Act, which highlights a few items such as the mandatory appointment of a compliance officer. This is the administrator of the ESS and has duties such as preparing documents with relevant information about your company.
Information is key and the Companies Act stipulates that all employees must have full information concerning the business, including financial statements and the state of the company. Any prospective shareholder must be given the opportunity to make an informed decision, including your employees.
The compliance officer also reports in the company’s annual statement the number of shares distributed to employees, dividends and all the other details, such as producing, filing with the Companies and Intellectual Property Commission and distributing share certificates to all employee shareholders.
Another administrative issue is the structure of the scheme. The most common and fairly simple structure is a collective scheme in the form of a trust, which holds all the shares allocated to employees. Within the trust each employee holds a number of shares distributed to them.
The other method is whereby each employee directly holds shares in the company through individual purchasing.
Both structures have their benefits and drawbacks, but a collective scheme or trust seems more prudent in the sense that it shows the intention and allows for a compliance officer to monitor the trust rather than individual employee shares.
Another advantage is that a trust is a vehicle for participation in the profits of the company through dividends rather than actual decision-making power such as voting, whereas direct ownership requires a shareholder to vote and make company decisions which might not necessarily be your intention with an ESS.
The obvious drawback to a collective scheme is that decisions have to be made unilaterally by all employees, whereas direct individual ownership allows for each shareholder to decide accordingly.