incentive schemes may be an element of staff retention strategies in 2021





Worried about holding on to key staff?

Considerations when implementing employee incentive schemes

Michael Tzirtzilakis

More than 70% of recruitment managers in small to medium enterprises expect to be hiring staff in early 2021, according to this poll from the Australian Human Resources Institute. The Reserve Bank is also reporting strong hiring intentions – despite concerns about the effect the ending of JobKeeper payments will have. A growing number of our clients recognise that they will need to keep their best workers engaged to help their business navigate continuing uncertainty. However between uncertainty and tight cashflows, pay rises might be some way off. So how can an SME keep a good worker engaged and stay viable?

How to keep your core team

For many SME’s, keeping their business running in 2020 was a bonding experience. We got to know each other very well over video calls, home-school challenges and mutual dislike of the word ‘pivot’. For many business owners, it was also a revelation of the team members they wanted beside them in a crisis.

Unsurprisingly, in the midst of the pandemic last year, most staff who had a job were not going anywhere and recruiters report their work “stopped dead in its tracks”. But as the economy shows signs of recovering, you may be concerned at the prospect of your key team members leaving for other roles.

Financial flexibility

Many companies are also concerned about cashflow and realise that pay rises might be out of the question at the moment.

A number of clients have contacted us recently about setting up employee incentive schemes for their key staff.

These might take the form of bonus schemes, or in some cases, share option schemes.

In most cases these would require the employee to remain in continuous full-time employment until the scheme matures – usually in a number of years’ time.

Reward and recognition

Bonus or share option schemes can be a way of thanking employees and rewarding them for their efforts. Surveys consistently report that employees say they are likely to leave an employer who doesn’t praise their work or show appreciation. In uncertain times, showing your team that you want them with you for the long term may be a particularly powerful gesture.

Bonus schemes often require certain KPIs to be met, so they are also a way of encouraging specific behaviours.

Giving staff a say

Once you give staff a vested interest in the company’s performance, they may want to have more of say in the direction and how the company is run. This can be a good thing, particularly if you are considering succession planning and getting some of your management team more involved in how the organisation is run.

Management experts talk about the fact that crises often force leaders to realise they simply cannot control everything. If you’ve been used to making most of the decisions yourself, the past year may also have taught you that you need to be able to hand over much of the day-to-day management if you are going to be able to lead your company through a crisis.

Avoid potential pitfalls: risk of discrimination

Generally schemes are set up so that an employee who leaves before the scheme matures, or who is terminated for cause, will forfeit any benefit under the scheme.

It is important to avoid potential discrimination, so we advise clients on how to provide for staff who go on maternity leave, who retire, or who resign on health-related grounds.

Unfair dismissal and breach of contract

If you are setting up a bonus scheme, it is important to be proactive in managing performance. Be particularly careful about managing terminations. If a staff member is terminated and misses out on a bonus payment they may be more likely to bring an unfair dismissal or breach of contract claim.

It is also important to be aware that once you implement a bonus scheme, you may be giving rise to contractual expectations. Companies may be found to have breached terms of an employment contract if they unilaterally change the way bonuses are calculated or awarded. (See eg Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181)

Shareholder risks

Consider carefully before you set up an employee share scheme. Making employees shareholders in your business gives them considerable power. Consider whether you are really ready for that.

Get the right advice

Incentive schemes can be an important part of your employee retention strategy. They can help you reward your best workers and keep them engaged, while still giving you some much-needed flexibility in your cash flow.

As well as the legal issues, employee retention schemes have tax and financial implications, so it’s very important you discuss options with your tax advisors before you decide on a scheme.


Michael Tzirtzilakis is a Special Counsel in Pryor, Tzannes & Wallis’s corporate and commercial law team. His clients span the manufacturing, property development, transport, finance, recruitment and online retail industries. For more than 20 years he has advised clients on a broad range of complex legal matters including employment issues, share issues, share buybacks, capital raising, mergers, corporate governance and commercial litigation.

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