Dealer groups that need to preserve cash during the coronavirus lockdown could support higher-paid staff with share options.
While most motor retail businesses are implementing furlough arrangements for the majority of staff, audit, tax and consulting firm RSM says this often falls short for higher cost senior management.
Martin Cooper from RSM’s specialist Reward & Incentives team, said: “To support senior management at this time whilst preserving cash, turning to share incentives is a non-cash way to pay people who need to keep working and cannot be furloughed, or to top-up those who are furloughed.
“For dealers who are considering this, there are four important things to keep in mind: equity reward can be used to preserve cash; there will be valuation-linked opportunities; some existing awards may need to be amended; and extreme caution should be used in amending existing options and share rights.”
Equity reward can be used to preserve cash
Dealers can look to replace cash bonuses with equity and/or negotiate lower salaries in exchange for equity awards. RSM says this needs to be structured carefully “to avoid the various tax pitfalls in this area”.
There will be valuation-linked opportunities – but think carefully
The current market conditions could mean lower values for shares. RSM says share plans could be a good way to incentivise staff to rebuild the value of the business, whether in the form of HMRC-approved options or growth shares.
Assessing the valuation impact on private businesses is difficult in the short term and companies need to avoid applying valuation comparators from distressed transactions to non-distressed businesses. However, for many businesses, EBITDA will fall for the current financial year, and with lowered growth prospects this will reduce valuations using traditional methodologies.
Some existing awards may need amending
Equity participation can strengthen employee engagement and act as an effective incentive, says RSM. However, the exercise prices, hurdles and performance conditions attaching to some existing awards will now prevent these from acting as an effective incentive, it warns. There will be opportunities for businesses, subject to shareholders views, with option re-pricing and revision of performance conditions.
Amend options and share rights with great caution
Businesses should exercise extreme caution in amending existing options and share rights, given the potential adverse tax consequences of getting this wrong, according to RSM. Amending EMI or other tax advantaged plans tends to lead to disqualification and amending growth shares tends to lead to immediate tax liabilities. It’s best to take advice before doing anything otherwise the costs of sorting it out later will be significant.
The Automotive industry analyst said that as the lockdown persists in a UK new car market that is unlikely to surpass 1.7 million units in 2020, the decline in trading is set to become “even more vertiginous” and attract attention to the financial fortunes of OEMs, suppliers and car retailers.