Many recruitment firm owners find it challenging to retain or attract quality managers in their business and often experience difficulties in deriving a successful strategy to compensate them. These days, across many of the private recruitment firms it is common for many of the top performing managers to request “equity” in the business as a form of incentive when commencing employment. In contrast to purely cash-based performance rewards, the provision of equity provides a longer-term and more tangible outcome for the manager via the receipt of dividends, the motivation to increase the business share price and also the opportunity to participate as an “owner”.
Changes over the past few years to the tax legislation, have meant that many firm owners have steered clear of employee share plan arrangements due to the complexity of the tax and compliance requirements associated with such structures. Ordinarily, where shares are issued to employees at a discount to their market value, the employee is taxed upfront on the discount amount which is often a disincentive to both parties entering into a share scheme arrangement.
However, despite these tax provisions, there are alternate ways to structure arrangements where both parties can end up with effective tax and commercial outcomes and with no cash exchanged by either party. One such arrangement is via a loan funded share plan.