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In March 2022, the government announced reforms to make it easier for businesses to utilise employee share schemes (‘ESS’) and reduce the red tape so that employees at all levels can directly share in the business growth they help to generate. These changes include:

  • amending the disclosure rules, allowing unlisted companies to offer an unlimited number of shares, of an unlimited value, as long as the employee is not charged more than $30,000 a year for them (up from a $5,000 a year cap). Employees will also be able to accrue up to $150,000 over a five year period; and

  • for employee share schemes where there is no payment to participate, independent contractors will receive the same treatment and receive the same regulatory relief as employees and directors who are participants in the scheme.

You want to motivate your top performers – how can you do this? There are a number of ways, depending on your goals and resources. This article looks at why you would implement a Phantom Share Scheme. For information on what a Phantom Share Scheme is and how it works, click here.

This article is focused on businesses who want to incentivise employees with cash rather than shares. Please note that there are significant changes to tax law, effective 1 July 2015 which make it more attractive for new businesses to issue options or shares to employees, under an Employee Share Scheme.

What is a Phantom Share Scheme?

A Phantom Share Scheme is a contractual agreement to make cash payments based on agreed metrics.

Why would you want to give employees cash rather than shares?

The number of reasons why a business would want to give employees cash payments rather than shares or options, these include:

  1. Remain as sole shareholder: You want to remain as the sole shareholder in the business, rather than have multiple shareholders. There are many reasons why you may prefer this, including that if you want to sell the business in the future, it is generally easy to negotiate a sale of business if the buyer only has to deal with one shareholder
  2. The company is cash rich: If your business has sufficient cash, then you may be able to pay annual cash payments to certain employees, akin to a dividend paid to shareholders.
  3. To give employees a more immediate reward: If you issue your employees with options or shares in your company, then the employee does not actually receive a tangible benefit until the options vest and the shares are sold. If you want your employees to have an immediate financial benefit then you may prefer a cash payment.
  4. Simplicity: You only want to issue your employees with options or shares if these will actually incentivise them. If holding options or shares in a private, illiquid company will not give incentive to your staff or encourage them to stay, then cash payments are a simple alternative.
  5. Low set up costs: Phantom Share Schemes have low administrative costs (compared to Employee Share Schemes) as payments are paid by the same methods as employee’s pay.

Conclusion

LegalVision can assist you to establish an employee share scheme or a phantom share scheme. LegalVision has a team of great lawyers experienced in both employee share schemes and phantom share schemes. Please call our office on 1300 544 755 and our Client Care team will happily provide you with an obligation-free consultation and a fixed-fee quote.

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