Why form an Employee Share Trust?
Most entrepreneurs feel that their company is too small to consider an Employee Share Trust. This is often not the case and there are some definite advantages to consider.
The benefits are motivation of staff and improving your B-BBEE rating. Let’s look at them –
We all know how important it is to have dedicated, motivated staff. Now, the very best of staff are not motivated principally by the possibility of reward, which is why any bonus system is unlikely to work. In fact, bonus schemes are generally demotivational because bonuses frequently fall below expectations or have to be modified because they become too expensive.
Participation in dividends is, however, more motivational as there is a direct link between the success of the company and the rewards received by the beneficiaries. This is achieved via an employee share trust.
The most common reason for forming an employee share trust is to obtain a BEE rating of level 2 (51% + black owned) when the company would otherwise be level 4 (less than 51% black owned). The beneficiaries of the trust need to be the black employees (usually only after they have been employed for a year) and they elect one of their number to be a trustee along with a company director elected by the company. The trust acquires 51% shares of the company and 51% of any dividends declared are awarded to the trust, which then distributes them to the employees, often according to a formula based on length of employment. The longest serving employees thus get a bigger share of the dividend.
It is important to understand that a company with less than 51% black ownership will have to undergo a BEE verification once its turnover exceeds R10m and is almost certain to drop from level 4 to a level 6 or 7, whereas a company that is 51% or more black owned only has to undergo a verification once its turnover exceeds R50m, so the level 2 is secured for much longer.
When an employee leaves the company, he or she automatically ceases to be a beneficiary.
It is recommended that a third trustee is an independent professional (accountant or attorney) and that this professional has a casting vote if unanimity is not reached.