Cake Equity | How to subsidise employee pay-cuts, with shares in your company – quick and easy!
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How to subsidise employee pay-cuts, with shares in your company – quick and easy!

April 7th, 2020   —   Charlie Ross

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The economic conditions have hit some businesses much harder than others – and many companies are hurting.

Lots of businesses are forced to consider making pay-cuts in order to keep the business afloat. However, as all CEOs, CFOs, Founders and HR Managers know, with a pay cut comes the risk that the employee might either:

  1. consider changing jobs to a more secure, higher paying role; or
  2. lose motivation to put in hard work for the Company.

There is a way to significantly mitigate these risks, and by using the below solution, you will likely find that your employees will end up more committed and more motivated than ever before, regardless of the card that you were forced to deal.

This may be the prompt you need to get your employees more invested in your Company – literally.

A great solution to keep your employees motivated, and to, well, keep them at all, is to subsidise their pay-cut with offers for shares in the Company.

This can be done through an Employee Option Share Scheme (ESOP), whereby, in simple terms, the employee will receive the right to receive shares in the Company, based on them staying with the company for certain time periods, or meeting certain KPIs.

If your Company is able to qualify for the ESS Start-Up Tax Concession, you are also able to structure the offer in shares so that the employee will not be taxed on the shares receive until they dispose of them.

We provide some more detail on how ESOPs work here.

Here is a basic example of how we have seen many customers setting up their salary subsidising plans this year:

HotSpot Travel Pty Ltd (HotSpot) is in the tourism sector, and has been hit hard by COVID-19, with revenues falling 80%. As a result, it is going to need to make pay-cuts across the entire team, despite government grants and assistance.

Joe works for HotSpot, and is currently paid $100k a year. Joe is a really valued team member, and HotSpot would hate to lose him, however it is aware that he may consider making a swap back to a more reliable job in the event of the pay-cut.

HotSpot determines that a 20% pay-cut is required for all employees to keep the Company afloat. However, it implements an Employee Share Option Scheme to subsidise for those cuts.

For Joe, this means that he will now be paid $80k in salary, however he will also receive $20k worth of options in HotSpot, which will ‘vest’, or become shares, conditional on him sticking around at HotSpotfor at least 12 months.

Other employees are granted options on similar terms, with some also required to meet certain KPIs in order for their options to ‘vest’.

Joe sees the real value in these shares as he expects HotSpot to do very well if it can get through this period, and he knows that the $20k worth of options may one day be worth much, much more.

As a result, he accepts the offer, and stays with HotSpot, putting more effort into his work, knowing that if he wants to see big value in those shares, he will need to help out!

A plan like the above is very simple to set up with Cake, and different vesting conditions, rules, amount of options and can be offered for different employees, depending on their role.

We help out with valuations, vesting rules, and all the legal stuff.

It’s not all about the $ savings

Other than the obvious potential financial benefits from of setting up an ESOP, the ESOP will bring out a number of bigger picture improvements, including:

  • increased sense of comradery in the team: all employees will feel more important, and more committed to the end goal, with less emphasis placed on their own interests before others.
  • decreased staff turnover: while this will also obviously bring financial benefits for the Company, it also increases employee morale and facilitates strong relationships within your team.
  • more big picture thinking: you will notice than as soon as employees have actual ownership in the Company, they will start to think differently. They will start each task with the Company’s long term goals in mind, and will always be ready to problem solve rather than dodge or handball challenging tasks.

In our opinion, setting up an ESOP is pretty much always a good idea, and if there was ever a good time to do it, it is now.

It doesn’t have to be hard – our platform and template documents can help you allocate options and set up your offers digitally in no time – all official and ready to go.

Got some questions? Chat to the team today, we are here to help!

If you liked this article, check out Employee Share Plan Jargon – All the terms, in simple terms or What is an Employee Share Option Plan, and why bother?

This blog is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.