While a purchaser may seek to negotiate earnouts with the vendor if key staff do not remain for a pre-determined period in the sale contract, there are other practical ways in which a purchaser could seek to retain and motivate staff post completion.
This article provides a general summary and practical considerations to offering bonuses and incentives to these key employees that transfer to the purchaser’s employment in a sale of business.
Types of Bonuses and Schemes Available
- Give the employer flexibility in considering whether or not to make a bonus, or payment, to an employee above their salary or other contractual remuneration, including the timing, the amount and the terms and conditions under which the bonus will be paid;
- The employer has no contractual obligation to pay the bonus;
- Typically, the provision of a discretionary bonus will not be mentioned in an employment contract; and
- Discretionary bonuses paid to employees are usually subject to income tax and other relevant deductions.
- Are binding promises by the employer to pay, subject to certain conditions being met, a predetermined amount, or an amount calculated in accordance with a predetermined method;
- The terms and conditions of contractual bonuses, including eligibility criteria, calculation methods, and payment timing, are outlined in the employment contract or company policy.
- Contractual bonuses are typically based on specific performance targets or achievements, including years of service with the employer (as a retention type bonus);
- Failure to meet the predetermined conditions may result in reduced or no bonus payment; and
- Contractual bonuses are subject to income tax and other relevant deductions.
Employee Share Scheme Generally:
- A company can grant ownership of shares to eligible employees by way of Employee Share Schemes (ESS), immediately giving an employee a right to purchase shares in the employer company, or Employee Share Ownership Plans (ESOP), giving an employee an option to purchase shares in the employer company at a future date.
- The terms and conditions of employee share schemes, including eligibility, allocation, vesting periods/conditions, exercise prices and what happens to the issued and unvested shares/options if an employee leaves their employment, are pre-determined (usually by the employer) and outlined in the scheme documentation, which will generally include a comprehensive company policy, disclosure document (as required), Shareholders Agreement and an option agreement/share sale agreement with the individual employee.
- Legislative reforms that came into effect from October 2022 make it easier for employers to utilise Employee Share Schemes and reduce the red tape, including amending the disclosure rules and 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 the shares. There are some conditions that need to be met, however.
- Tax implications and benefits of employee share schemes can vary depending on the specific scheme, the employer’s eligibility to specific reforms and concessions and the employee’s circumstances.