Employees are keen to climb the ladder to equity – but someone needs to provide the ladder - Succession Plus

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Employees are keen to climb the ladder to equity – but someone needs to provide the ladder

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Employees are keen to climb the ladder to equity – but someone needs to provide the ladder

By , November 7, 2009

Whilst the research undoubtedly shows an increase in employees looking for equity in the business they work for – Australia lags behind on the world stage in providing a mechanism to achieve this. According to recent research in both the United States and Europe a little over 30% of employees have some kind of equity interest in the business they work for, whilst in Australia that number is around 8%. In my view a simple mechanism to manage the transition through various stages is the issue – it is not simple, nor smart, to simply take an employee and provide them with equity – and thus the ladder becomes important.

A ladder simply means a step-by-step climb through the various stages to ownership and ultimately even control:

1. Employee – earning income (salary/wage/hourly rates etc ) – this is where most employees sit ( and stay ).

2. Income model – the first step on the ladder then is to boost that income and this is quite common – we often see companies paying bonuses, commissions on sales, incentives etc to increase an employee’s income and this I believe is the very first step on the ladder.

3. Profit share – most equity plans begin with this simple step and in fact many end at this step – simply providing a share of profits to employees is a great additional incentive as they are directly rewarded as a result of the financial performance of the company in the same way that a business owner typically would be.

4. Equity – whilst there are many equity plans available our Peak Performance Trust provides a formal structured mechanism to incorporate stages three, four and five into any business succession plan – this allows employees to transition into an equity ownership position within the business they work for.

5. Control – often this step is never utilised though on occasion has substantial benefits in terms of succession not only of business management but also ownership. Ultimately control means that employees can be transitioned through the earlier four stages and end up in a position of control – this may be that they take over general management or CEO of the company, it may be that they end up with a seat on the board at some future date however this step is not to be rushed.

As you can see there are logical steps on the ladder for employees to climb and where we miss steps or fast track is often where these types of plans fall over – the transition should be managed carefully with KPI’s and performance criteria to proceed to the next level. If managed correctly this is a great methodology to successfully retain and motivate key employees over the longer term.

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.