Incentivising your team bonuses or shares?

Retaining good employees is challenging for many businesses, especially SMEs, which invest heavily in training team members only to see them leave when they peak. Many of you are considering different ways to incentivise your team, and two popular options are cash bonuses and employee share schemes (ESS).

Let’s look at the pros and cons of each and explore some alternative financial incentives that could suit your business. We highly recommend consulting your business accountant before making any decision that can impact your business’s financial structure.

Both cash bonuses and share incentives can be effective tools for employee motivation and retention, but they differ significantly in tax implications and employee impact.

A cash bonus is straightforward and familiar to most employees. It’s processed through your payroll, and tax is withheld at the time of payment through Pay-As-You-Go (PAYG) tax. This approach means that employees receive their bonus in cash after taxes are deducted—no surprise tax bills later. This method is easy to understand and manage. It provides immediate financial rewards to employees, and the business has no complex financial reporting to manage.

On the flip side a cash bonus may be viewed as a one-time incentive and not provide the long-term engagement you’re seeking from the transaction. Secondly, it has an immediate cash flow impact for the business, which needs to be factored into your decision making.

Employee Share Schemes (ESS) allow you to offer shares in the business instead of, or in addition to, a cash bonus. The primary idea is to foster a greater sense of ownership and loyalty. Before considering an ESS, it is essential to understand that tax implications can be tricky for employers and employees.

On the positive side of the ledger, an ESS scheme aligns employee interests with business objectives and growth with the flexibility to structure the vesting schedule over time, encouraging retention. An ESS as an alternative to a cash bonus reduces the immediate cash impact for the business, which has advantages.

There are challenges in implementing and maintaining an ESS for your employees. For example, if an employee is given $50,000 worth of shares, they don’t pay tax on these shares immediately. However, when those shares “vest” (when the employee wholly owns them), the market value of the shares is considered taxable income. Employees may then face a tax bill without receiving any actual cash to cover it, which can create a cash flow challenge for them. These schemes also require regular business valuations, which can be costly and time-consuming, and require additional annual reporting to the ATO.

The short answer is yes.

Consider a deferred cash bonus structure if you’re looking for ways to reward and motivate your team beyond cash bonuses or share schemes. Bonuses are spread over time or linked to specific performance milestones. This approach can incentivise longer-term engagement while minimising immediate cash flow impact. Another option is a profit sharing plan. A portion of your business’s profits is distributed among employees. This approach creates a sense of shared success and is generally simpler to administer than ESS.

Offering bonuses on a tiered system that rewards different levels of achievement, such as meeting, exceeding, or greatly surpassing targets, is a popular alternative, particularly in sales focused roles. This can motivate employees to reach higher targets while keeping payouts aligned with performance.

Cash is king, and a bonus or the offer of an ESS is motivating for many employees. However, offering a flexible work schedule and lifestyle benefits can be as powerful as the coin. A culture that includes additional leave days, hybrid conditions for office or home, wellness programs, professional development opportunities, study support, and even free car parking can be highly motivating for employees and often comes with minimal tax implications for both the business and employees and may be a more achievable option in the short to medium term.

We’re here to guide you if you’re considering implementing cash bonuses, ESS, or other incentive strategies. Every business is unique, and we can help tailor a solution that balances reward, tax efficiency, and employee satisfaction.

Get in touch, and let’s explore the best incentive strategy to boost your team’s engagement and align with your business goals. At North Advisory, our expertise is to your advantage in creating a financially sound and motivating incentive plan for your valued team members.

North Advisory, located on Sydney’s Nothern Beaches, is ideally positioned to assist you and your business with expert financial management and taxation planning and implementing financial strategies tailored to your needs and industry. We specialise in small to medium businesses across a diverse range of sectors and have a diverse financial team with expertise at every touchpoint.

Marius Fourie, Director and Accountant, is a leading business accountant and advisor. He has helped many Australian business owners maximise their financial position and leverage opportunities leading to sustained and profitable growth.

Contact Marius today and secure your business’s financial future.