Why you should be considering an Employee Share Plan amidst Covid-19

In this article, we will be exploring the implementation an Employee Equity Plan as a viable option for companies looking for solutions to survive the economic downturn & long-term employee retention post Covid-19.  As the spread of the Coronavirus curbs we seem to be facing another crisis, a global economic downturn, one in which we are already seeing companies making job/pay cuts across the board. In Singapore specifically Gross Domestic Product (GDP) is expected to shrink by 7% in 2020.

The news has been dominated by stories of blue-chip companies like HSBC who introduced pay cuts to their executives for the next 6 months. Coworking space giant, WeWork, has laid off 2,400 of its employees. Devastating as these stories are, the actions taken are not new measures for coping with an economic downturn. Similar actions were taken both in the 2008 Financial Crisis and the 2000 Dot-com bubble.

We should ask ourselves, are these actions ideal given we’re now 10+ years on and still adopting the same measures for navigating through an economic downturn?

History tells us that taking these cost-cutting measures to keep businesses afloat during times of financial difficulty comes with severe consequences.

Some of these consequences include:

• Voluntary resignations as a result of reducing your current workforce. A 1% reduction in your current workforce can result in a voluntary resignation increase of 31% the following year
• Drops in job satisfaction and performance. When you impose a layoff, survivors will experience a 41% drop in job satisfaction and a 20% drop in job performance
• When you introduce a pay cut, it will adversely affect job performance

The driving factor for these consequences is that it causes employees to lose control over their employment and any survivors will be stretched to fulfil business requirements. This will only further impact job performance and increase voluntary resignation due to plummeting job satisfaction.

So, if we know the current solutions are not having positive long-term effects on businesses then what can be done? An effective solution could be the implementation of an Employee Share Plan.

We’ve detailed below some options and their benefits to companies:

1. Introduce long term incentive schemes. To replace short term cash bonus with an employee equity plan or share option scheme, allowing financial liquidity.
2. Revise current employee share plan. To increase rewards to employees who enhance (or reduce) company’s cost structure and increase operational efficiency during an economic downturn.
3. Revise current performance metrics. Lower the Total Shareholder Returns (TSR) to an achievable level and increase time frame for performance evaluation.
4. Bottom-Up approach. To offer long term employee incentive schemes to lower management people.
5. Adopt a bonus reserve, to fund incentive schemes.
6. For start-ups who are looking to drive company growth an Employee Share Option Plan would be an effective way to incentivise staff towards a common goal and subsequently drive growth.
7. For start-ups with an existing Employee Share Option Plan (ESOP) but are looking to offload administrative burden and maximise the workforce on revenue generating initiatives, should outsourcing their ESOP.

The overarching objective for each of these is to incentivise critical business units to perform at a high level in order to weather any economic downturn.

Like any challenging situation key to success is being razor sharp in everything you do. In the face of an economic downturn it’s not always every sector that is impacted. Industries like Healthcare Services, Technology Equipment, Software and IT Services are expected to benefit from this current pandemic and will continue to perform well.

Don’t get swept up in the emotion of sensationalised media headlines showcasing devastating job losses and pay cuts globally. Stick to the facts. A recent study conducted by AON has shown that only 10% of companies across Asia have implemented pay cuts amid the COVID-19 pandemic.

If you are in a sector that has been impacted and you need to make changes, don’t default to traditional measures (think job/pay cuts) consider your motivations for the changes you need to make and then evaluate if an employee share plan could be a solution for you.

Some key questions to consider when evaluate if and what type of share plan is suitable for you are:

• Is your company looking into rewarding employees based on long-term achievements?
• Are you looking into instilling ownership thinking into your employees?
• Is your company looking into replacing short term cash rewards, with long term equity rewards?
• Are you looking into driving different employees into achieving specific outcomes (i.e. TSR, ROE, Client Retention etc.)?

Remember that an employee equity plan scheme is not a short-term win but a long-term business strategy. Surveys conducted by AON have shown that 75% of companies who adopt a long-term incentive scheme will continue to utilise it. Be Open Minded. Realise the potential from your existing workforce and seek solutions to capitalise their performance and secure a business future.

We have designed an all-rounded encompassing solution comprising of an experienced Share Plan team of practitioners and a digital solution to help you manage your strategic initiative.