BASE REMUNERATION, LONG TERM INCENTIVES AND SHORT TERM INCENTIVES

Why

LTI’s assist in the retention of employees, which means the business can afford to spend more money on training. Additional training results in better qualified employees and a more productive and profitable business. And because employees are trained to develop job skills they feel more appreciated, more respected and have greater levels of job satisfaction which will ensure that they remain employed longer.

Retention

An Australian Human Resources Institute (“AHRI”) survey has found Australian employers are losing an extra $20 billion per year as staff turnover increases dramatically.

• A dramatic increase in staff turnover figures across Australia is putting people management practices under pressure.
• An AHRI HR pulse survey has found most organisations have employee retention problems.
• An overwhelming majority reported an impact on the organisation’s effectiveness and the bottom line.
• Most also believe their organisations are not prepared to deal with the labour crisis.

Staff turnover in Australia has increased by more than 5% as the continuing staffing crisis caused by the skills shortage and the ageing population puts people management practices under pressure.

Optimum Remuneration

The optimum remuneration strategy has three elements: fixed remuneration (what you are paid to come to work), short-term variable remuneration (your profit share, incentives and bonuses) and long-term incentives (usually a share in the capital value of the organisation – an EPP).

Fixed remuneration or base pay, as it is also known, is commonly defined as the salary or the pay amount given to an employee for performing the daily duties of the defined job.

Short-term incentives – including annual incentives, bonuses, commissions and the like – reward the individual employee for achieving certain goals over a short period. The measurement period for short-term incentives is most often quarterly, semi-annually, or annually. Short-term incentives can be measured based on the individual’s own performance, group or team performance, or the companies overall performance. This depends on the organisation, the incentive plan, and the level of the individual within the organisational hierarchy.

LTI’s delivered though EPP’s – including shares, restricted shares, share options, phantom shares, share replicators, participating units, and the like – measure organisation-wide performance, typically over several years. The intent of such plans is to provide incentives for employees to improve the overall performance of the organisation by linking the employees’ long-term rewards to the organisations long-term results.

EPP Plans

EPP plans reward participants (e.g. employees) for attaining results over a longer measurement period. For this purpose, long-term generally means more than one year, and typically is between two and five years.

The form of benefits delivered from a long-term incentive plan is normally cash or equity. The reason an employer would choose one or the other depends on the goals of the plan, the type of recipients and the availability of cash or equity for delivery of those benefits.

LTI – WHAT’S HAPPENING INTERNATIONALLY

There is currently, a large amount of international research in the area of ESOP’s, the majority of which emanates from the US and, more recently, from the European Union (“EU”). The key difference between the US and EU research is that the implementation of ESOP’s is relatively widespread in the US in comparison to the EU (and Australia). The widespread acceptance of ESOP’s in the US has broadly been explained as a direct result of tax-incentives introduced in the 1970’s and 1980’s in the US. Many of these incentives continue to have effect today and encourage further acceptance of ESOP’s by both employers and employees in the US.