Global crises, like that presented by COVID-19, cause economic shockwaves around the world. They pose serious challenges to businesses across all sectors and geographies, including in the Middle East. Simultaneously, they force us to change our ways of thinking and working, and to re-assess what it is that has driven success in the past and what will do so in the future. One of the key stakeholders in any business – small or large – is its employees. This realisation gives way to two questions: how to keep employees engaged in challenging times? And, how to ensure that they are incentivised to outperform in the future?
Employee Incentive Schemes have evolved to take many forms. In western countries, employers commonly award shares in the employing company as a means of incentivising employees to grow the value of the business while keeping cash pay to a minimum and thereby saving costs. But this may not be appropriate for every employer, particularly in countries where local customs, laws and business practice have led to preferences for other types of plan. These include “phantom” share plans, cash bonus schemes, savings schemes and pension plans, “flexible benefit” plans, etc.
A well-structured employee incentive scheme or benefit arrangement can encourage longevity, deepen the relationship between the employer and the employee and align the interests of the employee with those of the owners of the business. These schemes are typically established in tax-neutral jurisdictions under a trust style of structure and where there would be easy access to appropriate levels of administrative expertise. This type of arm’s length, outsourced arrangement is also often seen as more reassuring for employees.
By providing both the employee and employer with a digital, real-time portal from which the incentive scheme is managed, a number of benefits become apparent:
In the Middle East, given sensitivities surrounding the control of privately held companies as well as legal restrictions on foreign ownership, the traditional incentive scheme model may not always be desirable or practicable.
Each business will have different objectives, and these – along with employee KPIs – would be taken into account during the design phase. Long term incentive plans are highly flexible: as such, for Middle East businesses, one could consider three broad arrangements:
Let us first imagine how an incentive plan involving employee share ownership may look for a public or private company in the Middle East. The process would begin with the ownership / management taking a view that in order to increase the value of the company by a significant multiple, they are willing to give away a minority of the shares, subject to employee achievement. Since, in most GCC countries it is not possible to establish different classes of shares, the company would offer normal shares to its employees whilst entering into separate contracts, prohibiting them from attending or voting at AGMs and accepting dividends. The shares could be held via an Employee Benefit Trust, which would be a separate ring-fenced managed fund, making the employees the beneficial owners of the shares, thereby giving them ultimate security that they will receive the reward.
Should a private business not wish to part with shares, a phantom share scheme may be the solution. Employees would be eligible for a cash equivalent to the value of the company’s shares. In order for this to work, the company would need to have regular valuations carried out, or employer and employee could agree the valuation is equivalent to a multiple of EBITDA shown on the annual accounts. This would provide the employee with a legal right to a formulated amount of money if the company succeeds.
Finally, a company may wish not to enter into either of the above options, but may go one step further than a traditional cash bonus, in order to further engage its employees. A deferred annual bonus plan is a concept of joint investment in a cash bonus scheme whereby the employee could elect to accept only a prescribed portion of his cash bonus, using the remainder to purchase real or phantom shares in the company, with his contribution towards that purchase matched by his employer, giving the employee both a larger total reward and a stake in the success of the business.
The common denominators of all of these options is employee engagement, productivity and longevity, resulting in an increase in business value.
Many companies have recognised that the current economic crisis caused by the pandemic has resulted in equity markets suffering their greatest falls for many years. Private company shares are generally valued taking account of movements in the prices of quoted comparators. While share values in general are low there is potential to give employees share based rewards with the prospect of substantial capital growth as and when economies and businesses recover. Those potential capital gains will be a key incentive for many senior managers, especially in the many countries where capital gains attract substantially lower tax rates than earnings.
As future information requirements are identified, so we will look to engage with clients and their advisors as much as we are able, or legislation and regulations allow.
For most entrepreneurs, it has become vitally important that the successive generations do not dissipate the wealth accumulated over a number of years.
A Jersey Private Fund ("JPF") is a simple and highly flexible fund product that will be of interest to promoters who are looking to launch funds for groups of investors where a fully-regulated product might not be necessary or appropriate.
Fiduchi is uniquely placed as a provider of offshore fiduciary services, with a presence in the Middle East, which can assist businesses end-to-end with employee incentive schemes. From the outset, the design of the scheme, through to implementation, administration, online portal provision and reporting, Fiduchi has the capabilities and mechanisms to be a single point of contact for companies looking to grow their businesses.