The backdrop for employee benefit trusts is positive, as firms focus more sharply on employee motivation and retention. Also, the surge in IPO activity in Hong Kong has provided a boost, as a significant number of these offerings have involved the establishment of employee-related trusts.
Employee benefit trusts (“EBTs”) hold assets, often company shares, to be held in trust by an independent trustee to be awarded to some or all employees of a company. They are a tool that is used to attract, retain and reward the most valuable personnel. This can be the entire workforce, or it may only involve a sub-set of key people, known as “selected employees”.
As competition has intensified for talented people who can deliver business success, so has the need for incentives above and beyond salary packages. EBTs offer several advantages for both companies and employee beneficiaries.
When the trust holds the company’s shares to be awarded to selected employees of the company, then the incentives are said to be ‘in alignment’. In other words, the beneficiaries have an increased stake in the success of the firm and, in turn, an incentive to remain with the company rather than to take their skills elsewhere.
Companies remain in control
An EBT is more attractive than alternative methods of attracting and retaining employees (such as bonuses, subsidized accommodation, motor vehicle use or other fringe benefits EBTs can also deliver most of the benefits of employee share ownership without the company having to give up control over the voting rights of the company shares before they vest in the employees.
The trust can act as a ready-made buyer for the shares of those leaving the company, assuming such a departure is considered incompatible with continued participation in the scheme. And because the trust and the company are separate parties, the trust can continue to function even if the firm that established it becomes insolvent or is taken over by another company.
A simplified structure
Reforms to Hong Kong’s trust law, introduced in 2013, increased the attraction of a trust-based approach. These included greater control over assets and investments by those establishing the trust and the ending of a ban on establishing perpetual trusts. The changes set out a statutory duty of care for trustees and streamlined the appointment/retirement process for trustees. In addition, the legislation stated that any foreign laws could not impede the validity of asset transfers in relation to a trust governed by Hong Kong law. Also, there was an amendment to the guidelines on the excessive accumulation of income.
The digital backdrop
The administration of EBTs has traditionally been performed ‘manually’, either in-house or contracted out to a third party. However, the move to digital platforms, particularly in the past 12 months, is gathering pace. Increasingly, the administration of trusts is being handled via electronic platforms.
There are clear advantages to this approach. These platforms offer greater flexibility given their ability to reach a beneficiary directly, via a dedicated website or a smartphone application. This can include the instant communication of any changes to laws and regulation or voting decisions by a trustee if they are acting as ‘one’ shareholder of a pool of shares. The administration of the trust can be streamlined electronically, with online record keeping reducing both compliance risk and the chance of human error. Trustee education can also be improved, with more immediate access to learning tools that can help with their role.
The protection of data
Whichever type of administration is chosen, one critical factor is the need to protect the personal information of the trust’s beneficiaries. Data protection rules are especially relevant with EBTs, given the likelihood that sensitive details about beneficiaries’ financial position are likely to be held.
EBTs have enduring popularity both to their beneficiaries and the companies that establish them. Their flexibility is a particular attraction, as is their potential for tax efficiency. Above all, they are a valuable tool to reward key employees, thus giving businesses a vital competitive edge. Technology may change the way they are managed, but the principles behind the best employee benefit trusts and the trustee’s critical role remain unchanged.
