Executive
incentive plans
Securing talent with tailored incentive plans
Executive incentive plans are recognised as an effective way to align the interests of executives and equity holders, and to attract, retain and motivate participants. The corporate and tax aspects of incentive plans are complex and specific to each jurisdiction, requiring tailored advice from plan design, thorough tax and securities law considerations (for each jurisdiction in which a proposed participant is located when the offer is made), and documentation.
Plans should be carefully designed and proactively managed to ensure participants are appropriately engaged in the business, taking into account the commercial goals of the business (for example, dividend yields, exit horizon, growth trajectory), the breadth of intended participants, and intended taxation and accounting outcomes.
Our dedicated Executive Compensation Group
Hamilton Locke’s Executive Compensation Group has specialists in our Corporate, ECM, Tax and Employment teams that are dedicated to executive incentive plans and at the forefront of market developments. We have a deep network of advisers across accounting, valuation and remuneration consulting and provide an integrated or modular service, based on the business’ needs.
We provide comprehensive advice on the design, implementation and maintenance of incentive plans and assist both public and private clients from the earliest stages of design through to liquidation of a participant’s interest. We act for sponsors, corporates and management teams and are actively involved with peak bodies such as the Australian Investment Council in connection with policy and market development in this area.
How we can help
- Advice on all aspects of Australian securities laws and co-ordinating local law advice as required
- Advice on the application of employment laws and the interaction with executive service agreements when implementing the plan
- Advice on the tax implications for both the business and the participant of a particular incentive plan
- Development of the appropriate documentation to implement the plan in the context of corporate governance obligations and regulatory considerations, in particular at the intersection with shareholders agreements, constitutions and listing rules
- Advice on suitable funding and governance arrangements for incentive plans
- Customising global plans for Australian participants
- Implementation of plans for Australian companies in other jurisdictions through our international network
- Work with specialist financial advisory firms globally on the structuring, implementation and related economics of incentive plans
Common types of incentive plans in Australia and expected taxation outcomes
Below is an overview of various types of executive incentive plans and potential tax outcomes to consider when structuring and implementing such plans.
Start up plan
- Instrument: Shares or options
- Acquisition price: Options can have a nil acquisition price whereas shares can be acquired at a discount of up to 15%
- Exercise: If an option, the exercise price must be at least the fair market value of a share at the date of grant of the option
- Tax considerations: Gains are deferred until disposal and can be taxed concessionally under the CGT regime*
- Available for start-up type companies (strict criteria apply)
- Safe harbour market value rules can apply
Share plan
- Instrument: ordinary shares or any other class of shares (including growth shares, preference shares or redeemable shares)
- Acquisition price: Depending on incentive structure, shares can be acquired at market value through an interest-free loan
Alternatively, the share can be issued at a discount and/or salary funded - Tax considerations: For market value acquisitions, capital appreciation should be taxed under the CGT regime. Where shares are at a discount, they can be structured as tax deferred if they meet certain criteria
Rights plan
- Instrument: Performance rights; share accretion rights, or share rights
- Acquisition price: Often a nil acquisition price
- Exercise: Following vesting, may entitle the participant to a share or an option to acquire a share at an exercise price
- Tax considerations: These are usually structured as ESS tax deferred plans to delay the taxing point until the participant can exercise the rights
- Common with ASX-listed companies
Option plan
- Instrument: option to acquire ordinary shares or another class of shares
- Acquisition price: Often a nil acquisition price
- Exercise: Depending on incentive structure, these could have a nil exercise price, market exercise price or premium exercise price
- Tax considerations: Nil / market value exercise price are often structured as an ESS tax deferred plan. Where the option is a premium priced option, gains can be taxed concessionally under the CGT regime
*Under the CGT regime, individuals and family trusts may benefit from the capital gains tax discount which can reduce the capital gain derived on securities disposed by 50% (if securities have been held for at least 12 months).
Broader commercial objectives and intended outcomes
The value of the incentive may vary significantly depending on various factors, such as the growth potential of the business and intended taxation regime for the participant.
See illustrations below of different types of incentive plans, and whether they are capital account or revenue account-based arrangements, and the flow-on outcomes.
*Capital account – taxed under the concessional CGT regime (refer above).
**Revenue account treatment in Australia typically results in the incentive being taxed under ordinary income rules.
Experience
* Some of the above representations were undertaken while at previous firms
Pemba Capital Partners
Acted for Pemba Capital Partners on its acquisition of various companies and related group structuring, including management incentive arrangements
Real Petfood Company Group
Acted for Real Petfood Company Group and Pepper Group on multi-jurisdictional management incentive plans.
Global Private Equity Funds
Acted for global private equity funds Oaktree Capital Management, Summit Partners, Bain Capital, ICV Partners, H.I.G, Apax Partners, Lion Capital, Apollo Global Management, Sun Capital Partners, Marlin Capital, Cobalt Capital and others on various Australian acquisitions and management incentive arrangements.
Domestic Private Equity funds
Acted for domestic private equity funds Pacific Equity Partners, Archer Capital and Colinton Capital Partners and others on various acquisitions and management incentive arrangements.
Waste Services Group
Acted for the Management Team in the sale of the Waste Services Group to Carlyle.
Everlight Radiology
Acted for the Management Team in the sale of Everlight Radiology to Livingbridge.
