Equity in lieu of fixed salaries: a wealth sharing framework for business continuity during COVID-19

With the ‘Coronavirus Cost’ to business, companies are seeking new approaches to create workforce stability as non-essential expenditure is shut down and teams are moved to skeleton frameworks or work from home arrangements.

At REMSMART, we are encouraging businesses to consider an alternative strategy to secure their financial future while retaining staff: distributing equity in lieu of fixed pay. Essentially, this involves restructuring remuneration packages by introducing a temporary reduction in salary, in exchange for continued employment and an allocation of options at prevailing share prices.

Distributing equity has the potential to deliver vast economic and social benefits—offering organisations a once in a lifetime opportunity to rethink the way they incentivise their entire workforce and redistribute wealth among all employees, a substantive benefit usually only available to executives.

Of course there is a financial motivation, with organisations essentially being able to save on cashflows because they are delivering reduced salaries. But it also allows companies to step up and be strong corporate citizens.

Offering employees equity at today’s prices means that they will reap rewards when the market recovers, which in turn drives motivation and encourages commitment and loyalty during this time of hardship. It also helps them in balancing the additional debt incurred over the COVID 19 period.

And while some critics warn offering options based on today’s dwindling share prices is ‘opportunistic’, I believe this strategy has great transformative potential, especially at a time where staff are required to work harder than ever before.

As Mark Connelly, Non-Executive Director of West African Resources, said in our recent webinar ‘Equipping and Incentivising ‘War Leaders’ in a Financial Crisis’, “I’m all in favour of issuing options at current share prices, it’s a fair and reasonable approach. Some of the milestones and KPIs would look a lot different today. So as an incentive to retain staff, I would certainly be considering it.”

Derek La Ferla, Non-Executive Chairman of Sandfire Resources NL agreed, commenting “Just reducing salaries in and of themselves is not enough – we need to think of ways to incentivise people and to structure remuneration so that it make us fitter, leaner and more purposeful.”

Of course, some caution should be exercised in structuring equity packages to avoid dilutory issues which are always a concern for shareholders. It also presents a good opportunity to evaluate the performance of your workforce and a mechanism to reward those staff who demonstrate the right behaviours with the potential to contribute greatly to the organisation’s recovery efforts.

It shouldn’t be seen as a cash spree, however, and there are certain conditions and criteria for eligibility which should be met in order to propel staff forward. These include minimum terms of employment and individual and company performance metrics.”

And despite the pernicious financial impacts of COVID-19, the full effect of which is still yet to be seen, the silver lining for many companies is the rare opportunity to wipe the slate clean, take stock and re-evaluate.

The prevailing logic is that only executives should get equity because they have line of sight, but that isn’t necessarily the best strategy. With unemployment sitting at around 25-30%, we have a real opportunity here to innovate and optimise business operations, including of course, remuneration.