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IPSA advice: Using equity incentives during Covid-19 crisis

By April 24, 2020April 27th, 2020No Comments

As the economic impact of the Covid-19 pandemic continues to reverberate, IPSA is advising employers to consider using equity incentives as an alternative mechanism to remunerate employees.

Providing employees with a stake in the company for which they work is always a good idea, but particularly in times of economic upheaval. Staff are more engaged and invested in the survival and success of the business, while there are potential tax savings for employees and PRSI savings for employees.

For companies that are considering equity incentives as an alternative to cash-based remuneration, IPSA Council member Keavy Ryan and her colleagues at A&L Goodbody have prepared the following advice…

How equity incentives can assist with cash consolidation

Keeping employees and executive teams motivated and engaged as they work hard through challenging times has never been more important. However, the need for cash preservation will mean that many companies are restricted in their ability to make increases to short-term compensation – for example, in the form of retention payments or increased annual bonuses. An award of an equity-based incentive is an alternative mechanism to remunerate your employees which can offer benefits for both the company and the employee.

Numerous studies have proven that companies which have an element of employee share ownership are not only more profitable, but are more resilient in times of economic recession. Share based remuneration can also be paid to employees free of employer PRSI which is a significant saving in comparison to cash-based remuneration.

Also, if awards can be structured in the form of a ‘clog’ or restricted share award, there may be significant income tax savings for employees – up to 60% saving on the taxable value of the award, if the shares are clogged for the maximum period allowed.

What to do in respect of equity awards which are outstanding

For current ‘in-flight’ or outstanding awards, it may make sense to defer revising goals or targets until there is more stability, or to rely upon discretion to create flexibility. Reserving the right to make adjustments for unexpected events and expenses related to COVID-19 should be considered.

For publicly listed companies, the Remuneration Committee needs to be cautious in the use of any such discretion and review the terms of the share plan carefully. Private companies will generally have more flexibility but many, particularly PE backed companies, may be under pressure to revise or reconsider targets and thresholds.

Many companies will most likely simply want to wait and see and anecdotally this seems to be the favoured approach for the moment. By the end of the current financial year there will be a better overview of the impact of the current volatility on equity awards and on the business as a whole.

Not all businesses will be affected in the same way by COVID-19 so there is no “one size fits all” approach. In general, how companies approach equity arrangements very much depends on the performance of the business, the terms of the equity plans and whether the business is publicly listed or privately held.

We have an all-employee share plan – what issues should we be thinking of?

In respect of all-employee plans, companies should be mindful of the broader employee base becoming nervous of contributing funds to buy shares given market volatility and potentially looking to exit share plan participation. Companies cannot give any investment advice but could consider freezing plans or allowing contribution holidays, provided that the plan terms allow for this. Communication to the broader employee cohort will be key.

Also there may be operational issues arising in the administration of share plans in the context of remote working arrangements. Companies should make an assessment of whether additional time is required in respect of commitments to deliver shares or whether there are additional data protection security measures required.

The situation with regard to COVID-19 is evolving rapidly and we will continue to publish articles and information on a regular basis with a view to assisting employers and the wider community during this challenging time.

More information is available here or keep up to date with the latest developments at the A&L Goodbody COVID-19 Hub.