An Effective Remuneration Strategy When Cash Flow is Tight - Succession Plus

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An Effective Remuneration Strategy When Cash Flow is Tight


An Effective Remuneration Strategy When Cash Flow is Tight

By , August 13, 2020

The COVID-19 operating environment has caused most businesses’ revenue to plummet. However, despite revenues taking a sharp downturn and cash flows tightening, employee salary and wage rates remain the same. Needless to say, this will weigh on your business’ profitability. Implementing an Employee Share Ownership Plan (ESOP) in your business during this time could solve your problem.

Offering employee ownership incentives through ESOP instead of providing high salaries would improve a business’ cash flow and thus, overall financial position. ESOPs are self-funded - increased profits are directly linked to performance payments made into a trust on behalf of employees. This trust is then used to purchase employer shares. It also involves equity, which exposes employees to capital gains and dividends when the company distributes profits. Not only will ESOPs promote profitability during this tumultuous time, it engrains ownership mindset in your workforce. This mindset ensures employee retention, engagement, motivation and encourages and rewards peak performance, which is especially important during this uncertain time. ESOPs are not an inferior option to wages and bonus systems; while these systems are still encouraged, they are short-term income-based models which are less effective than long-term incentives which can be achieved through implementing an ESOP.

An additional perk ESOPs carry is tax benefits. Businesses can reduce its income tax and increase its cash flow and net worth by issuing shares to an ESOP. Through this strategy, a company can go as far as considerably reducing or even terminating its corporate tax liability. Furthermore, by selling to an ESOP, owners are able to extract cash which may pose as essential a time where your business is not generating its usual income.

Interested to know more about ESOPs? Check out our eBook.

Elizabeth Tjan