MEDIA RELEASE 17 June 2008
The good, the bad and the ugly of incentive schemes
With unemployment at its lowest in 33 years, it has become a challenge for many
businesses, particularly SMEs, to attract and retain effective and productive
employees.
One way of doing this is by offering employees attractive staff incentives to
encourage loyalty, increase productivity and promote a positive staff culture.
However when considering setting up a staff incentive scheme, one must consider
the tax implications for the business.
Michael Derin, managing director of Azure Group, a chartered accountancy firm
that specialises in providing strategic business advice to SMEs, says many SMEs
see the benefits of setting up a staff incentive scheme but get lost in
structuring and implementing the programs.
"There are many incentive schemes that employers can use, and when setting one
up, it is vital to establish what you want to achieve by implementing an
incentive scheme, consider what will motivate your employees and to consider
your budget. Each and every scheme has its own unique taxation and compliance
issues and this can make the difference between a scheme working or failing,"
said Derin.
There are numerous choices when it comes to incentive schemes and each option
has its own advantages and disadvantages.
Lump sum bonuses
This type of reward is popular as most people appreciate extra cash. Although
Derin said these types of rewards are not always linked to the business
performance and often not implemented in a way that drives team productivity.
Salary sacrifice
Salary sacrifice has gained a lot of interest recently and many employers
provide some form of salary sacrifice arrangement for employees.
"The biggest advantage of this type of system is the employee's net 'after tax'
position is improved. The downside, however, is that it is often in lieu of
salary or sometimes may be part of an employee's job requirement, for example, a
company car. So this form of incentive is not always valued by an employee,"
said Derin.
"Fringe benefits tax is a key element of salary sacrifice and represents a cost
to the employer. If an employer pays an employee's private health insurance, the
employer would be liable for fringe benefits tax, almost doubling the cost to
the employer," he added.
Other types of incentives that may also attract fringe benefits tax include
travel incentives, meals or even movie tickets.
"Because this isn't a cookie cutter approach to rewarding staff, these types of
incentives can work really well and can even help improve workplace culture,"
said Derin.
Equity based schemes
This concept is driven by key employees aligning their financial interests with
the company and engaging them in the long term commitment and success of the
business.
"These schemes can form the foundation of success for a company, particularly in
its infancy, and they are becoming more common, especially among SMEs," said
Derin.
"These types of agreements can be complicated and require shareholder
agreements. Another drawback is they can be the most costly to structure and
legalise because of their broad nature," he explained.
Extra leave time
Providing an opportunity for employees to 'buy' extra leave is not as common but
can work well as most employees value extra leave time to balance their work and
home lives.
"This system is the most tax advantageous for the employer but can be difficult
to administer and manage," said Derin.
"There are many things that can go wrong when setting up an incentive scheme and
the biggest hurdle to overcome is the 'buy-in' from employees," said Derin.
"Implementation is key. Employees have to appreciate the reasons for a rewards
scheme and it should be structured to maximise commitment. Most people respond
well to motivation and rewards, and it is important for the success of the
business to have the support and commitment of employees," he added.
Derin stressed that it is important before setting up any incentive scheme
program that the business owner seeks advice to ensure the scheme is set up
appropriately and tax implications are dealt with correctly.
Tips for setting up a staff incentive scheme:
1) Establish the goals and objectives you want the scheme to achieve. Why do you
want to reward your staff and what are the expectations?
2) Undertake some research to try and find out what incentives are preferred by
your employees.
3) Consider the budget and what you can afford.
4) Be transparent and open with employees and keep them informed on the progress
of the scheme.
5) Start small. The first scheme you put in place does not need to be the
perfect scheme, in fact it is unlikely to be.
6) Establish a scheme before the start of a financial year so that it is linked
to the business' financial goals and engage staff in the incentive to get the
year off to a positive high.
7) Seek advice from your accountant.
Azure Group is a Sydney-based chartered accounting and financial services firm
which was established in 2002 by Michael Derin. Since its foundation Azure has
grown exponentially from a turnover of just $250,000 in the first year to $1.5
million in 2007.
Derin started Azure Group with the idea of offering strategic level commercial
advice to SME clients. The fundamental thing that he identified was that SMEs
rarely get that level of assistance because they can't afford or attract an
experienced full-time Chief Financial Officer (CFO) normally only afforded by a
large corporate and they can't find it in the consulting world.
As well as the CFO outsourced service, Azure Group is an experienced chartered
accounting firm that provides ongoing service and handles one-off projects for
clients. It provides its clients with proactive compliance advice to ensure that
a client's tax position is considered throughout the year, not just at tax time.
For more information on Azure Group, visit
www.azuregroup.com.au
or call (02) 9238 1188.
Released for Azure Group by Dennis Rutzou Public Relations (www.drpr.com.au)
For further information please call Joanna Gitsham or Nicola Rutzou on (02) 9413
4244.
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