Should you attract top performing executives with equity in your company?

By in Accounting and Finance, Development, Opinion

One of the biggest challenges faced by private companies or IPO’s in the SME space is the battle for top executives. The right leaders create success so it is crucial for top level management to have the required skills to implement the most effective strategies. Competing with ASX listed company salaries however, is just not possible in most cases. So what else are people looking for? What can you offer to recruit and retain good people? What about equity? Does it work? Here we analyse some pros and cons:

  1. For executives – Taking equity or shares as part of a salary package may be considered a risk for some, but for others it is extremely attractive mainly due to:
  • Wage growth has been low in Australia and whilst there are reports growth is anticipated in 2018, equity has the potential to grow remuneration at a faster rate
  • Cash remuneration may not be the be all and end all with a 47% plus tax rate
  • The candidate may be looking to take on some business risk if they believe in the organisation’s vision and are motivated to see something grow or be part of a success story
  1. For companies  Offering equity is a strategic move that effectively makes an employee a shareholder and therefore gives them a vested interest in the company’s success which allows them to:
  • Directly link performance to remuneration. If personal remuneration is related to company remuneration or growth, the executive is going to do everything in their power to achieve objectives.
  • Ensure a committed team. A company needs a strong leadership team to achieve both short and long term objectives, so giving the drivers of business strategy an incentive that should increase over time will help create a long-term attitude.
  • Share its vision. The company must have a compelling idea, product or service, which, when pitched is likely to win buy in from the market and foremost, its executive group. It’s imperative for any business to succeed to have a leadership team who strongly believe in the future of the company.

If equity is your carrot, the next question to consider closely is how should performance be measured in an equity arrangement? Is EBIT enough? Some might argue that it’s easy to measure, visible and CFO’s in particular have a direct effect of its result. Others argue whether additional factors should also come into play.

Current trends and industry commentary in the listed space indicate that EBIT is only one measure, when potentially other measures are more relevant for the goals of the business. Perhaps a combination of EBIT and an organisational growth measurement like total shareholder returns are better targets. Particularly in start-ups and private businesses, an EBIT measurement may be irrelevant when the real objective is long term growth. If the reward is for an EBIT target, it might be better to consider a bonus scheme rather than a share – so the short-term goal receives a one-off reward.

Perhaps the hardest part of an equity incentive is determining the value. What is a pre-IPO company

worth? What percentage of a company should be given away? It’s nice to keep equity but if it means passing up an opportunity to raise capital and effectively have a larger percentage of less value, is it the best option? It might be better to give up the company and earn it back through achieving performance goals.

In the end, the commercial objectives of the company have to remain the focal point and needs to underlie any equity plan. However, equity is just one form of remuneration. It is the complete remuneration structure and strategy for all employees that should have considered objectives and measures.

Speaking with one of William Buck consultants who understand both current and future growth objectives will help you employ the right strategy for engaging the right people.

 

 

 

 

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