Keeping staff incentivised

AGAINST A background of disimproving economic circumstances, employers have become more discerning when it comes to employee remuneration, writes Fiona Reddan

Bank of Ireland recently announced it would cut its employee share option scheme from 6 per cent to 3 per cent of salary, after its profits fell significantly during 2007, while tougher market conditions mean that employees are less likely to receive bonuses equivalent to those of recent years.

At a recent seminar held by law firm AL Goodbody, speakers examined how employers can incentivise employees given the new economic reality, and identified how changes in Irish and European legislation on share incentive schemes may make such schemes more attractive, as well as giving advice to employers on how to avoid disputes when establishing bonus schemes.

According to Nora Ward, a Senior Associate in AL Goodbody's Share Scheme Unit, despite the impact turbulence on global markets is having on share incentive schemes, changes in this year's Finance Act will improve the attractiveness of one of the most popular types of these schemes, the approved Save As You Earn (SAYE). These have become increasingly common among quoted Irish companies, such as AIB, Anglo Irish Bank and Kingspan. Under the schemes, the company grants options over shares to its employees, and at the end of the savings period, typically three or five years, employees can then exercise their options and purchase the underlying shares.

This year's Finance Act increased the maximum monthly savings limit from €320 to €500 in respect of savings contracts entered into on or after February 1st, 2008. Employees pay no income tax on the proceeds of their savings plans, but profits on the sale of their shares are liable for Capital Gains Tax at 20 per cent.

Ward says that there are a number of ways of improving liquidity in SAYE schemes, such as the recycling of shares, whereby the trustees buy shares at the end of the trust period from employees and then sell them on again, or through the creation of an internal market, wherein buyers and sellers are matched every six months or so.

Another change in this year's Finance Act that employers offering share incentive schemes need to be aware of relates to convertible securities. This will affect companies which seek to reward key employees using a separate class of shares from the company's ordinary share capital, as new income tax charges will arise in certain circumstances including, but not limited to, grant, conversion and disposal.

From a European perspective, another issue raised at the seminar was the impact of the EU's Prospectus Directive on setting up share schemes. Under the directive, for companies without a European listing, employee share plans could become more expensive because of the significant cost to produce a prospectus that must meet different requirements.

However, Sheena Doggett, a partner in AL Goodbody's corporate department, believes the European Commission will take a "light touch" approach to such share schemes and an exemption will be introduced in due course.

Bonuses have long been an integral element of employee remuneration and, according to Barry Walsh, a partner in the firm's employment law group, they are now back in vogue, with an emphasis on cash payments.

As Walsh highlighted, bonuses are important because they can generate loyalty among highly performing employees who are profitable for the firm, while also sending out a message to those employees who need to step up a gear.

However, by their nature, bonuses have the potential to generate a lot of controversy within firms, with potential for dispute if the schemes are not communicated and delivered effectively. Walsh expects to see an increase in the volume of such cases going forward, and as such, recommends that firms document their bonus schemes - either in an employment contract or a stand-alone written scheme.

Problems with bonuses mainly arise when payments are "discretionary" and badly documented, and Walsh asserts that transparency with regards to how the employee qualifies for a bonus payment is key to avoiding claims.

Custom and practice can often make the payment of bonuses more complex, as if an employee has a pattern of established payments, they have the legitimate expectation that they should get the payment provided they do what they've always done.

Walsh gave the example of the Clark/Nomura case from 2000, where the bank's payment of no bonus to an employee was ruled to be perverse and irrational as the employee made money for the bank. However, the courts don't always rule on the side of the employee. In the Ridgway/JP Morgan Chase case in 2007, the bank successfully defended itself against ex-trader Daniel Ridgway, who sued the bank for $3.5 million in alleged lost incentive compensation. The court was satisfied with the bank's decision-making process in the issue, and upheld its zero bonus payment to Ridgway.

It is also acceptable for bonuses to lapse if an employee resigns or serves notice before payment date of the bonus, says Walsh, but clear terms must be in place outlining this.