For the many companies facing severe headwinds as a result of COVID-19, at risk, or variable, pay frameworks will kick in as part of each company’s automatic stabilisers to keep things going. But it will not be sufficient. Hence, some companies have, with their executive’s concurrence, reduced executive fixed pay. Again, and while investors and proxy advisers should appreciate the gesture, it will not be sufficient.
The next step could see companies immediately offering employees equity in lieu of fixed pay. At present, the tax rules on salary sacrificing for employer equity would limit this to $5,000 per year. Hopefully, the government will see the benefit of lifting this limit to enable employers and employees to work together on getting through the COVID-19 crisis.
Equity in lieu of salary is akin to a capital raising, and will keep more employees employed. Given the uncertainty of future value, and the likelihood that some companies may seek a dilutive capital raising as the COVID-19 cycle is worked through, companies may seek to offer employees an incentive to sacrifice fixed remuneration for equity that would not be liquid for at least 6 months. The usual mechanism would be a discount from face value, or a company match to face value acquired.
There is some judgement required. An employee with no savings, mortgage repayments, and mouths to feed may not be able to participate, but may appreciate the fact that more cashed-up colleagues are pitching in to assist. The employees pitching in should be compensated for the risk, and likely dilution, but not necessarily reap rewards that in hindsight appear gratuitous.
Here is a checklist of what is required:
1 . A review of employment and broader-based enterprise agreements to determine the extent that current contracts allow for salary sacrifice
2 . A shareholder-approved equity plan to issue share rights at no cost to participants
3 . An offer letter that vests the rights in line with service (after all, employees are giving up salary, so they should own the share rights as they perform the services. This service condition facilitates tax deferral)
4 . An exercise restriction of at least 6 months, or until the next trading window (whatever is the latter)
5 . Dividend entitlements on the share rights (to keep the employee whole)
6 . Flexibility for the employee to choose when to exercise after the exercise restriction has ceased.
7 . Great employee communications describing the opportunity, and how employees can also help other colleagues through COVID-19 by giving up their cash pay for company equity
8 . Board approval
It would be in keeping with the above that directors also sacrifice fees for equity. However, we note that few ASX 300 companies have sought shareholder approval for equity plans specifically for NED equity grants.© Guerdon Associates 2020 Back to all articles