Business SA’s Quarterly Survey of Business Expectations (SOBE) for the September quarter, prepared in partnership with William Buck, has uncovered a lack of labour force availability as a common concern among the business owner respondents. Almost two thirds of respondents (62%), said they had found it harder to source labour in the September quarter (July, August, September) compared with the previous quarter. This is up from 59% finding it more difficult to source labour in the June quarter compared with the previous, demonstrating that it’s becoming progressively harder for business owners to attract talent. Those surveyed were from both white and blue collar industries, with over 70% stating that the difficulty was due to a lack of suitably skilled workers available and almost 20% concerned that the cause was a lack of incentives for workers because of the increased rate of Jobseeker ($250 a week).
It’s hard to believe that in the last 18 months there’s been a shift from job security concerns and enforced pay cuts to a skills shortage across a number of industries.
In years gone by, labour market shortages could be addressed via migration policies – however international border restrictions have blocked this strategy. In fact, 22% of respondents to the SOBE Survey said the reasons it was more difficult to source labour over the past three months was due to reduced international labour market.
The current mismatch between demand and supply would usually mean employees have significant power in their remuneration negotiations, which would lead to a growth in wages. However, there is still significant uncertainty regarding the economic outlook, particularly in certain industries. We are witnessing a two-speed economy, with some sectors continuing to be impacted by COVID-19 restrictions.
And if all this isn’t enough for businesses to contend with, overseas studies forecast a mass exodus of employees as they emerge from COVID with different priorities and goals.
It is therefore more important than ever for employers to have an effective and cost-efficient strategy to attract and retain key staff. In the current environment, this means offering competitive remuneration packages while keeping a tight rein on expenses.
William Buck has extensive experience in designing tax effective remuneration strategies, to help incentivise staff and increase the value that you offer to your employees.
We have outlined potential remuneration strategy options, and key matters to be considered.
Short-term incentives
Examples of short-term incentives include cash bonuses and pay-rises, with 34% and 57% (respectively) of respondents to the recent SOBE survey answering that they offer these incentives to staff. These incentives are simple to implement and quite flexible, however the potential downsides include:
- The employee’s bonus is subject to tax at their marginal rate
- There are various employer on-costs (i.e. payroll tax, WorkCover etc.)
- Do the bonuses incentivise the employee?
- Is there an expectation the bonuses will continue, and therefore does this impose ongoing financial commitments for the employer?
Salary packaging
Salary packaging is broadly where an employee arranges to receive less cash salary, in return for certain benefits. The types of benefits that can be effectively packaged will depend on your employer, the industry you work in and certain individual circumstances. Over 20% of respondents to the September quarter SOBE survey said they offer salary packaging incentives. Common benefits salary packaged include:
- Motor vehicles
- Computers and other devices
- Tools of trade, and
- Car parking.
Due to the concessional tax treatment of certain benefits,h salary packaging can often provide employees with a greater after-tax cash position, while not costing the employer anymore. Furthermore, employment on-costs such as payroll tax, workers compensation and superannuation guarantee can sometimes be reduced.
One potential disadvantage of salary packaging arrangements is the administration costs in establishing and maintaining the policy. The arrangements can also be quite complicated for payroll to operate.
Equity incentives
Equity incentives are a component of an employee’s remuneration package that provide employees an opportunity to owning a portion of the business they work for, usually via shares and options. Only 6% of respondents to the SOBE survey said they offer equity incentives to staff.
Equity incentives can:
- Help the business attract and retain talent
- Promote the company’s long-term success by aligning interests between owners and employees, and
- Improve an employee’s remuneration package without impacting the business’ short-term cash flow.
Whilst used extensively by public companies, equity incentives can be more difficult to implement for private businesses. For example, it may be a family business who are unwilling to offer ownership to an “outsider”. It is also more difficult to determine the ‘value’ of a business, when it is not publicly traded on a stock exchange.
A recent trend we have seen with family groups is ‘Phantom Share Plans’, which aim to replicate the benefits of share ownership without granting actual ownership to the employee. These plans seek to deliver an amount to a participating employee (usually via a cash bonus), linked to the increase in the value of overall business.
A Phantom Share Plan can be administratively simple to establish, is flexible with how the award is calculated and does not have the Corporations Act obligations of a normal equity plan.
However, there are also potential pitfalls with these arrangements:
- The cash bonus can lead to a cashflow issue for the company, especially if the ‘value’ of the business rises rapidly
- The employees are subject to tax at their marginal tax rate on the cash bonus
- It can be difficult to ensure it is undertaken on an equitable basis – i.e. how do you determine the value of overall business, which in most cases can be extremely subjective.
- There are various employer on-costs (i.e. Payroll tax, WorkCover etc.)
Another option we are seeing are loan-funded share plans. These arrangements generally involve the employer providing an interest-free limited recourse loan to enable certain employees to acquire shares in the business at market value. The limited recourse feature of the loan means that the employee is protected from downside risk if the value of the shares falls below the outstanding loan balance.
When implemented correctly, these arrangements should not have adverse tax outcomes to the employee or employer. However, these arrangements are complex, and it is critical that appropriate documentation be prepared otherwise unintended tax outcomes can arise. It is also advised that a FAQ document or other guidance be provided to the participating employees, so they understand the potential income tax implications of these arrangements.
Total remuneration approach
We have seen a trend towards communicating ‘total remuneration’ benefits to employees, where financial and non-financial benefits are quantified and made visible to employees. Quantifying the total remuneration will better inform employees and allow them to compare their package with that of other organisations.
The following components may be included in the ‘total remuneration’ approach:
- Fixed salary
- Variable performance incentives:
- Short term incentives
- Long term incentives
- Other non-financial benefits, which may include:
- Flexibility to work between the office and home
- Training and development initiatives
- Parental leave
- Income protection insurance
- Other benefits i.e. free gym membership.
Research indicates that employers who adopt a ‘total remuneration’ approach can see an increase to employee engagement, decrease in staff turnover and even a boost to the employer’s brand.
Conclusion
Australian businesses are faced with labour shortages in a time of continued economic uncertainty. This is forcing many to think outside the box and implement financial and non-financial incentives to attract and retain staff. With many options available including share schemes, bonuses, increased workplace flexibility, salary packaging and training and development initiatives, there’s no one size fits all approach. This means that what works for one business may not work for another.
It’s important to talk to your local William Buck tax advisor if you are considering any of the above options, so that we can work with you to identify and implement the most suitable and effective remuneration strategy for your business.
