There are often good reasons to link employee rewards with overall company value, particularly in the case of senior executive employees. However, the formal requirements associated with share schemes and schemes based on shares (or their price) can be disproportionately burdensome, for example:
- the company may be required to obtain an Australian Financial Services Licence (AFSL);
- the company may have to issue a formal disclosure document; and
- share schemes may be subject to the requirements for managed investment schemes.
ASIC has recognised that these issues may deter employers from providing incentive schemes that would otherwise benefit employees and recently issued two new class orders (CO 14/1000 and CO 14/1001) aimed at reducing this compliance burden. Those schemes covered by the new class orders will be exempt from complying with many of the formalities that would otherwise be required under the Corporations Act.
The changes significantly reduce the compliance requirements for certain types of incentives (including performance rights, phantom equity and cash alternatives), and can be expected to benefit companies that use these structures. The new class orders also cover more employees outside senior executive level, including some casual employees and contractors.
Notwithstanding these changes, even under the new ASIC class orders, a variety of obligations will still apply, for example:
- there must be no fundraising and the incentives offered must be within the applicable share capital limits;
- offer documents must be provided which address specific issues, including an advice warning and general risk warning;
- the employer must provide information about the terms of the incentive scheme and information relating to any special features of the of the offer;
- professional trustees managing schemes may still require an AFSL;
- ASIC must be notified where employers are relying on the class orders and information must be provided as to certain features of the offer; and
- for unlisted companies there are a number of additional requirements.
Given the plethora of regulations which continue to apply to employee incentives, the question will be whether the reforms actually achieve the objective. It will be interesting to see whether the result is that more companies actually offer these types of incentives to more employees and how this impacts current trends in remuneration.