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New Zealand’s ongoing tight labour market and record highs for wage inflation have been well-documented. When wage inflation continues to grow, retaining key staff through remuneration alone can prove difficult.
However, countless articles show that people are more likely to stay in their role if they are well remunerated, enjoy the culture of the firm and have a clear pathway for growth/ownership. Minority shareholdings for employees is one way to encourage retention, and we are seeing companies implementing this more frequently in recent times.
A minority shareholding can encourage or solidify an ownership mindset for an employee. A minority shareholding means they have “skin in the game”, either through a cash purchase for the shares or a vendor finance loan. The best way to ascertain a value for shares in your company is to talk to your business advisor. Employees with an ownership mindset typically have a longer term, business-wide focus in comparison to short-term KPIs to attain a bonus. They will share responsibility for growing the client base or increasing sales, supporting the development of other staff and focusing on inefficiencies in the business.
If a competitor offers a 15-20% pay increase to your staff member it may not be prudent to match the salary due to the potential ripple effect, and relativities with salaries of other staff. If that same staff member had a 5% shareholding and a clear path to ownership, they are far more likely to decline any job offers from competitors.
New Zealand has an ageing workforce with many small business owners nearing retirement. Bringing on a minority shareholder earlier, with a clear path to succession, could be an easier option than selling on the open market when you want to retire. This may involve bringing an employee in with a 5% shareholding with the view to hand over more in future years. Having a younger and motivated shareholder could keep the business growing right up to the day of retirement for the exiting shareholder.
When granting a minority shareholding to an employee, it is crucial to effectively communicate and convey this decision to the entire team. It is essential for other staff members to comprehend the reasons behind this business decision to prevent any negative emotions and foster a sense of unity among all shareholders.
A power imbalance exists between majority and minority shareholders, as the latter possess limited influence over the company's decision-making process. It is imperative to establish a balance between the rights of both majority and minority shareholders to ensure the smooth functioning of the company. Prior to signing the shareholder agreement, careful consideration should be given to setting up this balance for success. Ensure that the agreement addresses shareholder rights and obligations to provide clarity and protection for all parties.
There are also tax implications for the company providing the shares and the employee receiving them, so specialist tax advice should be taken before issuing shares under a scheme.
Implementing minority shareholding for employees offers significant benefits in staff retention and business growth. Granting employees a stake in the company fosters a sense of ownership, leading to long-term commitment and a focus on organisational success. Moreover, it provides a competitive edge, as shareholding employees are more likely to decline offers from competitors based solely on salary increases. Additionally, minority shareholding facilitates succession planning, offering a smoother transition for retiring owners and ensuring continued business growth.
However, successful implementation requires effective communication to foster unity among shareholders and careful consideration of the balance between majority and minority rights. In a tight labour market like New Zealand's, where staff retention is crucial, embracing minority shareholding as part of a clear retention strategy can help businesses secure their top talent, inspire their workforce and thrive in a competitive business landscape.
For more advice on minority shareholdings, contact the author (Baker Tilly Staples Rodway Tauranga Business Advisory Services associate Matt Marshall) at firstname.lastname@example.org, or another of our nationwide Business Advisory specialists.
DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.
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