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This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.


Ghost shares for staff who walk

In the current economic climate of high employment rates and labor shortages, large companies are battling to attract and keep staff.

Imagine how hard it is for small to medium sized businesses trying to do the same.

It can be harder still for SMEs to attract senior staff in the face of stiff competition from larger companies offering career opportunities and endless benefits.

That's where initiatives such as phantom share plans can come in handy, according to KPMG middle market advisory partner Dominic Pelligana.

A phantom share plan is not based on real shares in the company. Essentially a way to divide a company's profit and share it around, it is a mechanism for smaller businesses without listed shares to offer senior executives an incentive to join a company and help drive profits, often to prepare the business for sale, Mr Pelligana explains.

''A lot of businesses in the middle market space operate through trusts, so they don't even have shares,'' he says.

''Others are private companies and people are reluctant to give up any sort of ownership.''
Typically, a phantom share plan may operate by an employer offering a potential employee a 5 per cent notional share in the company, says Mr Pelligana.

This might mean the employee could receive, for example, 5 per cent of annual profits and a cut of the sale profit if the business is sold.

Another common model is to pay the employee a percentage of the improvement in the company's profit from the time of employment up until a set date, or sale.

''It is a mechanism to divide the proceeds of capital profit and share it, without the owner physically having to give shares,'' Mr Pelligana says.

''Giving shares has all sorts of tax implications, not to mention the loss of control that a lot of these private business owners are fearful of.''

He says a phantom share plan should be an agreement drawn up between the employer and employee from the outset. The agreement should include details of how the company will be valued, usually based on a combination of net tangible asset values and goodwill, Mr Pelligana says.

A key hurdle is getting small business owners to understand the benefits of such schemes, says Bill Shew, director of business owner services at Grant Thornton.

He says the biggest issue facing small businesses is the ability to attract and retain staff. Senior employees generally want to move on to start their own business, or to a larger organisation, Mr Shew says.

''Small business owners need to then consider, how am I going to retain this person? It's really a retention strategy in most cases.''

Mr Shew says it can be a struggle for small business owners to weigh up the retention issue with their own desire to not give away control or ownership of the business, often because they've built the business from scratch.

''It's like giving away the front bedroom of a house.''

But he says phantom share plans should be part of a strategy to grow a business, not simply because ''everyone else is doing it''.

Taxation lawyer David Coombes of Deacons says phantom share plans can be beneficial because they are tax efficient for employers and employees.

Unlike real shares, phantom shares are not caught by a clause in the Income Tax Act, and are therefore more like a cash bonus, he says.

But it does need to be decided whether a phantom share payment will be declared for tax purposes as income or capital gain, Mr Coombes says.

Otherwise, he says it’s a useful tool for small business owners.

''This is a very good means to assist small businesses,'' he says, ''because employers are not giving up equity in themselves, and employees are happy because they are working towards a bonus which is based on their contribution to the increment in value of the business.''

Michelle Draper, August 22, 2007
My Small Business,


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