In this first episode of The Trusted Adviser Podcast, HPH Solutions CEO Rob Pyne dives into the detail of the HPH employee share plan, sharing the experiences, challenges, and key takeaways from implementing an employee share scheme to incentivise and reward key staff members. The conversation covers the importance of aligning employee incentives with business growth, and how share plans can be a powerful tool for long-term retention and business success.
LISTEN
SHOW NOTES
Key Topics Discussed
1. Introduction to Employee Share Plans
- Why businesses may choose share plans over cash bonuses.
- Aligning employee incentives with company growth and retention.
2. Implementing a Share Plan
- The process of introducing an employee share plan and how to structure it for long-term success.
- Insights into setting up unit trusts and how they work in conjunction with employee equity.
3. Bank and Legal Considerations
- Challenges with bank financing and how employee shares impact company guarantees.
- Legal structures to ensure smooth transitions and mitigate risks.
4. Equity Ownership and Employee Participation
- The importance of allowing employees to buy into the company and how ownership stakes drive motivation.
- The decision-making process behind offering shares to employees and the conditions for participation.
5. Performance-Based Share Plans
- How performance and growth targets influence share issuance.
- Encouraging long-term commitment through structured vesting periods.
6. Admin and Operational Challenges
- Managing the administrative complexity of share plans as the business grows.
- Practical approaches to handling multiple tranches of employee equity.
7. Good Leaver/Bad Leaver Clauses
- Addressing the exit of employees from share plans and the conditions under which shares are bought back.
- Importance of clear legal frameworks for employee exits and equity retention.
8. Valuation and Fairness
- How to strike a balance between fair valuation for employees and maintaining company equity.
- Using consistent valuation methodologies to ensure transparency and fairness in share transactions.
9. Real-Life Success and Growth
- How the employee share plan has driven business growth and strong cultural buy-in from the team.
- The role of leadership in fostering employee engagement through shared ownership.
10. Future Considerations and Adjustments
- How to scale the employee share plan as the business continues to grow.
- Lessons learned from past challenges and plans for future refinements.
Quotes
- “We didn’t want to go down the bonus path, we wanted employees who truly wanted to be part of the business long-term, sharing in its success as owners.”
- “The simpler it is, the better – especially when it comes to managing the administrative side of an employee share plan.”
- “One of the most enjoyable parts of this journey has been seeing employees succeed both professionally and financially as a result of the share plan.”
Actionable Takeaways
- Consider implementing a vesting period for shares to ensure long-term commitment from employees.
- Use clear legal and administrative frameworks to manage employee share plans, minimising future complications.
- Align share plan incentives with the business’s growth objectives to encourage buy-in and maximise results.
Resources Mentioned
- Succession Plus – mentioned for help in structuring employee share plans and performance-based equity issuance.
TRANSCRIPT
Welcome to the Trusted Advisor Podcast where you get a deep dive into the world of financial planning with industry leaders who shared their stories of winning and learning as they charted their path to success. This podcast is for the curious, those of you that like to dig into the detail, if that sounds like you get ready to listen and learn.
Rob Pyne:
Welcome to the first episode of the Trusted Advisor podcast. My name is Rob Pyne and I’m the founder and CEO of HPH Solutions. In this first episode, we are flipping the script and I’m in the hot seat playing the role of guest contributor, chatting with Ben Calder and Ivana Sanzari from Calder Wealth Management, and I’m sharing with Ben and Ivana all the details of our employee share plan. At HPH, we commenced our employee share plan in July, 2020, initially inviting three long-term team members to buy some equity in our business. That equity holder group has since grown to 16 above and beyond the five director shareholders in our business. In this episode, I share all the details of our plan, including the finance options our team have to fund their investment, how we approach the valuation of the business when selling equity to the team, how we encourage a long-term ownership mindset through a growth focused vesting schedule, how our plan functions like internal private equity, and finally the formula we use to issue equity to provide a clear path to ownership. I hope this episode is useful to anyone thinking of starting their own employee share plan or to anyone that wants to be a part of one, and that this episode sets the tone for the level of detail you can come to expect when tuning into future episodes of the Trusted Advisor podcast. With that introduction, let’s get into my conversation with Ben and Ivana.
So employee share plan, you’re thinking of doing something similar or you just weary at with that?
Ben Calder:
Yeah, I mean we are looking at sort of researching succession and I guess rewarding the team for growth going forward. So as you know, there’s probably a million ways you can do it and I like the idea of a share plan as opposed to cash bonuses. I mean there might be a place for both just really in regards to having them have skin in it, participate in the growth of the business as well, them do well from the growth out of the business and I guess as a way of additional retention and why they would want to stay with us
Rob Pyne:
For all of those reasons. We did that for years back now, as you know. And so it was definitely all about retaining and rewarding. We wanted to make sure we could keep our best people but also reward them for the contribution they were making and we didn’t really want to go down the bonus path either. We just decided that it was going to be more about finding people who wanted to be a part of the business longterm and they can share in the success of the business by being an owner as opposed to,
Ben Calder:
I mean we have fantastic tenure, so we have a great team and they’ve been with us. A lot of our senior advisors are approaching 20 years with us, so this is all new and in addition to everything that we’re already doing. So what’s your experience been with it and has it worked, has it not worked? Where hasn’t it worked I guess? What would you change?
Rob Pyne:
Yeah, so overwhelmingly, it’s been a positive thing for us and our team. We now have 16 share participants in our unit trust, and everyone who’s been invited in has accepted the opportunity to buy into the business, which has been great and obviously great for them, too, because it’s been growing, and they’ve shared in the growth. So what we would change, and then I’ll get into some of the specifics of what’s working I guess, but start what we would change. We started down the path of talking to Succession Plus and Craig West was super helpful.
And getting us to the point of understanding some of the dynamics you can set up inside an employee share trust. He has an off-the-shelf product, which essentially deals with the issuing of equity to employees based on performance. So it’s a performance-based issue of stock, and it’s units in a unit trust. We didn’t want to go down that path where we were issuing that because gone through the process of getting a tax ruling and there’s not an immediate assessment on the issuing of those securities because of the tax ruling he’s got. It’s like a five year deferral of the tax treatment if you’re issuing securities. But we kind of just went away from that and said, we just want our people who want to be an owner buy in and basically take an interest in the business, we’ll put a valuation on it, we’ll offer them a position each year if they’re invited in and then those that wish to purchase equity can do so and therefore there’s no issuing of units based on performance. It’s purely a equity transfer
Ben Calder:
Which is still linked to employment and has conditions around it. Good leave, bad leave, all that sort of stuff as well.
Rob Pyne:
It does, yeah, for sure. And so that’s what we learned is that the trustee deed that Craig had developed obviously with a solicitor in his camp was specifically designed for that issuing of units, whereas we went away from that. So we amended the trust deed, but it still had some kind of hangover clauses in it that makes it look a bit hybrid. And what we learned in the process of now as we’ve grown our equity base to 18% equity ownership from employees, we have obviously bank finance and the bank won’t take security over that equity. So the guarantees that sit on directors are now disproportionately higher than the equity the directors own. And so that’s the learning that we’ve taken five years in. And so talking to the bank,
Ben Calder:
You could ultimately transfer those shares that sit in the unit trust to become direct shareholders as opposed to through the unit trust though, couldn’t you? And then
Rob Pyne:
We could. Yeah, we could, but we don’t want to necessarily do that in the way in which we’re going to deal with. It is in fact directly with the bank’s, lawyers and our own solicitor. We’re going to rewrite the deed essentially instead of going with an employee share plan deed, which has those sort of clauses in it that are kind of specific to employee share trusts, that’s where things get snagged with the banks. And so what we’re going to do is to essentially go with a standard unit trust and instead of having a purpose built unit trust, it’ll be a unit trust that has all the particulars of a typical unit trust, but then we’ll have a unit holder agreement, much like a shareholder agreement, which will have all the terms around good leave, bad leave tag along, drag along. All of that stuff can be contained in the unit holder agreement.
And so we can essentially get the same outcome and we can thankfully transfer the equity across without any stamp duty issues. So essentially we’re going to transfer the equity from the units in the current unit trust to a unit trust, and that’ll essentially give us that ability we believe with the banks to have them take security over that interest as well. And so the guarantee we spread across the entire equity base as opposed to, because as it grows the equity those employees have, then the directors who have direct shareholdings are having a higher guarantee on their holding than they actually now have proportionately in the business. And that’s why we want to make that change
Ben Calder:
And it obviously will give you a little bit more runway.
Rob Pyne:
Yeah, I mean we think that inevitably they’re going to
Ben Calder:
Lend you another whatever the value is on that 18% that you can’t access now if the right deal is presented themselves.
Rob Pyne:
That’s right, exactly. So that’s certainly part of it. And the unit holders obviously have terms they’ve agreed to in the unit trust that we’ve structured already and those terms will carry over, but it’s definitely probably the key learning that we’ve encountered.
Ben Calder:
So with that, so you, if you are just using it for key staff that you are making an offer to participate, they have to go and find all the money themselves. So if you said, Hey Joe, we’re going to allow you to buy a hundred thousand dollars worth of shares, they’ll need to go and have equity in their home or wherever they get it, but they’ll need to source that a hundred thousand personally that you’re not saying if you put up 50%, the firm will provide a facility, et cetera.
Rob Pyne:
We are giving ’em the option to do either they can use the business’ security or they can use their own security. And the difference for them is if they use their own security, obviously they can get better terms with their own property security lower interest rate, and they can decide how they manage the cash flows that come in the way of dividends. Whereas if they take the business as security because they don’t have equity in their own home sufficient to fund their interest, then they don’t see the dividend directly, it’ll go off the loan and the loan is higher, the interest rate is higher because obviously cashflow financed business debt, we’re not charging a premium. It’s simply what we are charged by the bank and we just pass that straight through. But it is a premium to what they can get if they have property security.
So in the first year, we are allowing for anyone who wants to use the business security, we’re allowing them to take the full interest of that purchase against the business. But years two and beyond, it’s a 50 50 arrangement, so they have to come up with half of the equity themselves. So let’s say we’ve got an offer to them and we say you can buy up to $50,000 worth of equity this year, and they say, I’d like to take that, but they can’t get the 20 5K themselves and then we match it with 20 5K against the business. They might only come up with 10, in which case we’ll match it with 10 against the business in case it’s 20 of their 50 they can take this year.
Ben Calder:
So it’s effectively the businesses vendor, I mean you’ve got your debt facilities, whatever with the bank, but they’re not taking a loan directly with the bank secured by GSA over H-P-H-H-P-H
Rob Pyne:
Is taking that finance from the bank and on lending it, and largely because the bank wouldn’t do small sums of loans for those amounts that were being purchased. So they allowed us to borrow the money directly obviously, and we passed that through. We then have a separate loan agreement with each staff member that takes the interest, takes the loan finance, so we have a separate loan agreement. Our accountant does all the preparation of the documentation around that now after originally getting it from, I think it was from Craig’s lawyers when we first set it up, but there is a private loan agreement now between us and each staff member that wants to business as security for their funding into,
Ben Calder:
And you basically just got the shares of security, so
Rob Pyne:
That’s it. Company trustee for a share trust and the trustee company, the directors are the directors of that company. Directors are the main business directors of that trustee company as well. So we have a level of management control over that trustee company.
Ben Calder:
Do you have trading windows in that if people they need liquidity for a new Louis Vuitton handbag or whatever’s going on in their lives?
Rob Pyne:
Yeah, we don’t have a trading window as such, but if anyone wants to sell out at any time, we allow them to do that and we just buy it back off them. So the business has got the means to simply buy shares back. That’s happened once. One staff member had to leave, he had a family tragedy and that changed his life immeasurably and he has essentially gone into retirement early because he needed the timeout. So we bought his shares back and that was something that the trust deed originally we had didn’t contemplate very well. So we had to navigate that in the way that the deed was written, but we managed to get that done and there is actually now a lot more flexibility around share buybacks than there was when we first set the deed up. The rules have changed there and our accountants have informed us that we can simply buy shares back or essentially by the shares back and the units get extinguished because there’s an equivalent number of shares issued to the trustee company holding it on in trust for the unit holders who have an equal one for one unit for that share.
And the unit holder agreement deals with the terms around that, which I can talk about as well.
Ben Calder:
And then it’s still effectively an employee, so the shareholdings there are linked to their employment or they can retain those units beyond their employment.
Rob Pyne:
It is linked to their employment and it’s one of the conditions of being shareholder or a unit holder called equity holder. You can only be equity holder if you actually are employed. And so we have a condition that they have to be sold back to the business if they depart. And the only exception to that rule is if you were a director for five years preceding your exit, then you can hold the interest in the securities for up to five years. And that’s typically around the shares. The way we’re structured now is we’re five directors that are shareholders and then we’ve got the unit trust, but we think ultimately the unit trust will become an increasingly important vehicle for the build out of the equity holders. And yeah, five years is the term. If you are a director immediately preceding for five years, we don’t want passive shareholders in the business. We want to be, it’s a very much an intention you’re in because you’re working in the business, you’re helping it grow, you’re part of the team. We don’t really want private money sitting on our balance sheet that doesn’t contribute significantly to the success of the business.
Ben Calder:
So then how do you strike valuation around that? So with that team member that needed to leave, that’s all set up and agreed. So you’ve got a formula that gets reviewed from time to time or to set the valuation on the shares.
Rob Pyne:
So we hold a very consistent valuation method and so that’s just the same as they pay on the way in, we pay on the way out. So obviously it’s a different price because the price has obviously increased over time, but the same methodology is used on the buy-in by and a sellout.
Ben Calder:
So that’s just some multiple profit that you guys think is reasonable. Is that discounted to market? I know obviously we’re seeing some pretty big market multiples out there.
Rob Pyne:
Oh yeah. I mean it’s a good question. Is it discounted to market? Possibly We are not seeking to extract the highest value from our staff, but we don’t think we’re selling it cheap either. So we’ve come up with what we think is a very fair value and we know that if the market was to buy our business outright, we possibly would get higher multiples than we’re selling to our staff, but not dramatically. I don’t think unless we tested that in the market, found
Ben Calder:
Something you don’t over do it and it doesn’t work either. So
Rob Pyne:
Yeah, you don’t want your staff to pay a premium and feel like they’re being as extortion at price to buy in. You want them to want buy in and do the maths on it and say, if I buy in at this price, what will my dividend be and what will the likely growth be and show me the history of that and we do all that. So that’s why we’ve had great people are saying it’s fair and reasonable, it’s a good return on their investment and it has been. So people have been buying in have been enjoying a very successful period of growth for our business and getting a reward for that.
Ben Calder:
So 10 times profits of bargain? Bargain.
Rob Pyne:
Yeah. Yeah, it’s not quite that high.
Ben Calder:
Okay. How did you announce and roll out the share plan?
Rob Pyne:
Yeah, it’s a good question. I think, I’m trying to remember now. There was an employee share manual. We’ve actually got a manual which detailed the terms. We made that available initially to those we were inviting in. And so that was a very small group of people initially, which has obviously grown over the last few years. But we had employee manual and we actually just got those people in a room and just shared the terms, told them how we would be proposing to run it and asked if they were interested and everyone who was invited initially were interested. They took everything that we offered them in terms of equity opportunity to purchase and that trend has continued.
Ben Calder:
I have been thinking around doing it around, so I was initially thinking around, I like what you’re doing, where they’re, because they are going to receive the upside. So we’re obviously growing at a pretty aggressive rate much like you guys have been and we want that absolutely to continue and we want staff to be on board and aligned with that and then benefit from that. So that’s why I was sort of thinking around if we had budgets of X for the year and they’re not maybe at 10% under or whatever it is, let’s just say we achieve that budget and do X amount of a hundred thousand over that. Maybe we were sort of think we’d put 50% of that into the employee share pool that got allocated to certain individuals at different percentages and have a rationale around that really to incentivize for growth, but then also use the same structure for those that wanted to buy more, that we were comfortable that we were going to be leadership in the business and if they wanted to buy more they could. So we were looking at using it for both, but really to incentivize growth and even if we set some big hairy audacious targets where we would, if we got the business to this type of metrics, whatever the metrics are in five years time, X amount will drop into the, we will make X amount of value available in there, which would probably be gift, which would probably be gifted. So that would really be us sort of tripling in three years, which is mean everyone’s run rate’s going to have to increase significantly
To make that happen. So initially that’s where I was thinking about it. And then if we did want to offer X amount of shares, which so at the moment I own a hundred percent of the shares in the firm that we do it through that same structure that had all those conditions around it, which are related to employment.
Rob Pyne:
Another key learning I guess that I would share at this point is that the simpler it is, the better largely because the actual administrative effort involved as it grows, we’ve got a condition around as the business makes the offer available and people acquire an interest, they put, let’s say they put a hundred thousand dollars in and that’s their investment amount. We don’t allocate and essentially vest the growth on that a hundred thousand dollars fully until five years after that tranche has been issued.
Ben Calder:
Say that again Rob. Say that again, explain that.
Rob Pyne:
Yeah, so let’s say you bought in and you put a hundred thousand dollars on the line. We’ve actually made it such that the growth on the value of those units, because the unit trust obviously has a unit price or the share price of the company each year. We don’t allow for the growth to fully vest for five years. So at the end of year one 20% of the growth on that tranche is vested effectively, and if you were to leave, you would get 20% of the growth, not all of it. And so after five years at trache, you’ll actually have fully vested the growth in the business over that five year period, but every single purchase you make has a five year vesting period for the growth that it achieves. That’s intentional because we want people to not just buy in, try and make a quick win thinking, oh, call to wealth is growing great, let’s just buy in for a few years and try and capitalise on the growth and then we’ll just pull out and take it up, take it off the table. We had that situation with an employee who became a director for a period of time back at a few years ago and was in out in three years, and we sort of thought that was hardly the intention at the time.
Ben Calder:
Everyone playing the long game basically.
Rob Pyne:
Yeah, that’s right. That person may have had that intention to play the short game and we just wanted to guard against that in future to say that if you want to play the short game, this is not going to really work very well. So the long game is what we’re all about. Obviously directors are all about that and we want all our staff who are buying in to know that upfront and go, yeah, I want to be in. And I accept that there are, there’s a five year vesting provision on the growth. So that doesn’t mean to say life might not change. And now we’ve got I guess some extenuating circumstances in the situation where the staff member had to sell out because of his family situation. We didn’t apply that rule. We actually allowed him to take it in full. It was a clear good lever situation and that’s where the good leave, bad leave policy kicks in. If you’re a bad leaver, there’s no growth vesting. So if it becomes clear to us within 12 months of your departure that you might’ve looked like a good lever, but you were in fact intending to be a bad leaver, then we apply that rule and so we don’t need to pay that person out until 12 months after their exit. And by that stage we generally know whether they’re going to be a good or bad leaver.
Ben Calder:
Yeah, I think that’s a great idea, but obviously they’re still getting a hundred percent of the dividends from day one, so they’re not disadvantaged from a cashflow point of view just …
Rob Pyne:
Correct.
Ben Calder:
It’s really just to say you are aligned to the success of the business over the longer term and on that
Rob Pyne:
And we managed the dividend flow. Great
Ben Calder:
Opportunity for you.
Rob Pyne:
Yeah, that’s right. We managed the dividend specifically with the interest repayments in mind. So our dividend rate’s about 9%, so it’s covering, it was obviously more than covering it for a fair while and now it’s still just covering it. Obviously rates have risen, but we manage that dividend flow so people don’t have to put their hand in their pocket to fund the payments. We don’t actually have a principal repayment plan for the people who were purchasing. Even with the business security, because we initially had it forecast, it was about a seven year timeframe for the principal repayment based on the dividend flow, it’s now likely more to be a longer duration loan, but we haven’t enforced at this stage a principal repayment plan. The dividends just simply go off the loan they have and if it just meets interest only at this stage, that is what it is
Ben Calder:
And they can choose to reduce that with their own capital themselves if they want.
Rob Pyne:
Correct. And that’s the most likely scenario, and that’s where even people that now have the option to take the business as security where they have the option to do it themselves, they would do it themselves because the rates are a lot better and they can manage the cash flows. They’d rather be taking the dividend and paying off their home debt and not paying it off their deductible debt associated with their investment.
Ben Calder:
So if you are paying about 9%, that’s I can guess roughly what the dividend ratio payout is, but So you are still retaining a fair bit of capital in the business as well each over the year if it’s at 9%?
Rob Pyne:
Yeah, well the dividend rate’s nine and the business growth has been higher than that. So the return on investment for anyone is over 20% per annum. So it’s a pretty good combination of income and growth and that’s why it’s been a success for everyone who’s taken it and it’s why it’s attractive still for those being offered it. Yeah.
Ben Calder:
What have some of their concerns been? It’s okay if there aren’t any.
Rob Pyne:
The thing, as I was mentioning a bit earlier about the administrative overhead to do to run it, what has happened as people have bought more shares year on year on year, they started to ask questions around, well, can I separate each tranche then and can I be selective about which loan I’m paying off as opposed to the year two loan? Can I pay the year three loan off and leave the year one? And until there might be circumstances where they prefer a certain direct, like they’ve got their own means to pay it down, but they might be selective which loan they want to pay off because each tranch is really separately treated. And so we’ve had to create a fairly sophisticated sort of spreadsheet to manage not just each participant’s interest but each participant’s tranches. So we can actually better give them that flexibility as to how they want to manage that repayment plan for themselves. So that’s probably,
Ben Calder:
Which is painful I imagine.
Rob Pyne:
Yeah, there might be some software out there that’s designed to do it, perhaps we haven’t found it. So our accountants managing that as part of the accounting fees we pay each year, but they’re doing a good job of it and we’re confident in the way it’s being managed. It will continue to become, it’s a significant investment in admin time each year when we issue new units because obviously there’s the issuing of securities is the funding of the debt. There’s the loan agreements in place for everyone who takes businesses security that is recording each tranche, how much was purchased and how much of it’s business borrowed versus personally borrowed. But there is still an inbuilt incentive for people to try and use their own security where they can just because of the rate differential and the control of cashflow. But we don’t want to prohibit people from being able to buy in. If they’re young and really talented, then we want to retain them. We see them as a big part of our future. We want to make sure that they have an opportunity to purchase, which is why that first year we don’t require them to put up any money. We can put it up for them in full in year one.
Ben Calder:
And you’re pretty comfortable that way with exactly that where they can have all of it in year one, they’ve got a loan and you’re effectively garnishing the dividends to cover the internal, the loan which you guys are actually paying. Did you consider doing it any other ways or you are comfortable that the way you’ve done it, it probably works the best?
Rob Pyne:
Yeah, we’re comfortable. The way it’s working, it’s just being aware of the admin that goes along with it, but we’re comfortable the way it’s working, it’s giving flexibility to the staff members that have purchased. It’s working as intended. The dividends, as I say, are funding the repayments, even if it’s just predominantly just interest at the moment. So we are not concerned about that largely because what’s happening as people who don’t use the businesses security purchase and equity interest and they buy units in the unit trust that money that flows in, we direct that off a long-term debt that we have. So essentially it’s not only a succession plan, but it’s also a long-term funding plan for building the business balance sheet up. So people are actually paying off long-term debt. We projected our debt position and we’ll be debt free as a business in a relatively short period of time based on the purchases that are coming in from people that don’t need the business of security. And even for those that do, because we’re paying off other debt that isn’t the ESOP debt, at some point,
At some point it’s acquisition debt, at some point we’ll actually have very little acquisition debt left, meaning that was capacity there for us to grow. And now the bank, we bank NAB and they’ve said we are conservatively geared, so we are not always just busting to look for the next acquisition and gear ourselves up, but if we find a good purchase that we think would fit for us culturally and we’ve got the means to do it and we’ve got that, I mean we all know you’d rather pay off debt with capital than with cashflow that’s going to be taxed. So that money coming in is capital that pays off our long-term debt. So we’re not having to meet principal repayments from taxable income.
Ben Calder:
So everyone that sits in that unit trust, I would say our employees where all the direct holders will probably be some of the initial founders plus some of any mergers that you’ve done where those principles. So a lot of those, so a director, you can only be a director if you’re a direct shareholder effectively because those directors control the unit trust.
Rob Pyne:
That’s right. Two of the directors of firms that merged in with us have become directors of HPH. So we have essentially five directors. Three were originals effectively. I obviously founded the business. My brother came in and then another friend joined, and so there was three of us. Then there was the two that came in from two separate businesses that now five directors. But the more recent acquisition in July of last year, that director that wanted to stay in and do an equity swap took units in the unit trust. But yeah, for all intents and purposes, they ask the question why would they want to be a director anyway? I mean essentially you take on the legal liability
So as long as they get access to the return, they get access to the return like everyone else does.
Ben Calder:
It’s all the good and none of the bad.
Rob Pyne:
That’s right. So it’s working very well in that sense. And yeah, the way in which we issue units is we’ve decided to essentially dilute the directors over time by way of issuing units in the unit trust. So essentially the five directors don’t acquire any more shares over time, but each year we issue units in the unit trust. So that’s how we’re being essentially diluted over time. But we
Ben Calder:
You transfer some of your personal shareholding across to the unit trust?
Rob Pyne:
No, we don’t. So the exact number of shares that I own now is the same number of shares I own five years ago. But what happens is that as units are issued in the unit trust, because what we’re saying is that we do a calculation on the organic growth that has come through for the year. So we say organic growth of X has equivalent value of Y, that Y value is the growth in the value of our business that’s organically generated. And those people that are a part of the plan, we’re obviously directly a part of growing that organically, and we then allow for half of that organic growth value to be acquired. So let’s say we grow the business by a million dollars in value, half a million dollars would be available to acquire, and that is then divided up into proportionate amounts based on the salary of the staff member who’s in the plan. So that’s
Ben Calder:
Where does that cash go, Rob? Just into the onto balance sheet.
Rob Pyne:
The cash that they pay for those units goes into the unit trust and then gets transferred to the company and pays off the debt.
That’s why we’re building a strong balance sheet as we’re allowing our employees to take a stake in the business. And so it’s working. It’s quite a virtuous cycle at the moment. They’re helping us pay off long-term debt. They’re taking a stake in the business which is growing. Everyone’s winning at the moment, the way it’s working. And of course it’s no guarantee because the business has to grow because then you’ve got staff members that are not just employees that are just taking a paycheck but actually want to know that their investment’s also growing. And so if it wasn’t going well, we’d have some more challenges that aren’t just employee disgruntled employees but also investors.
Ben Calder:
They also have some control over that too.
Rob Pyne:
So correct,
Ben Calder:
We can try and do this and you’re going to have to have a bit higher run rate in regards to how quickly you’re getting through your work or whatever it is.
Rob Pyne:
Absolutely. That’s right. They’re an upside investor and just as they are, if it doesn’t go well. But thankfully because they are such a talented group, that’s why they’re investors because we offered it to them and they took it. That’s why we’re growing so well because we’ve got such a good group and they’re all a part of that growth and the success and they’re sharing in it. And it’s just great to see. Culturally it’s been really good for us. We have a quarterly unit holder meeting and chief operating officer Nick runs that gives everyone an update on the full strategy and the results of the quarter and how the business is progressing and what we’re planning and how we’re spending our money and all the rest of it. So they’re very engaged in the whole thinking and operations of the business. We have a normal monthly, sorry, weekly meeting anyway, a best practise forum what everyone’s contributing to the growth of the business and sharing best practise ideas. But it goes to another level when you’re an investor and you get that real buy-in and they are really both psychologically and financially bought in.
If you’ve got the right people there and we have it does really change. And maybe they were always that way anyway, probably predisposed to be like that, but it really makes them feel a part of what’s happening. And you get really strong engagement from the ownership group, which is a big group now. So we’re really pleased with the way in which people have brought in, as I say, mentally as well as financially, and that’s helping to drive the success of the business. And we’re growing faster than we ever have at the moment. And largely because those people are doing great work.
Ben Calder:
Do you have many that aren’t in the plan that think they should be in the plan and maybe the director group thinks otherwise, but whatever reason?
Rob Pyne:
Yeah, I mean it’s definitely something we have to be mindful of. Obviously we’ve been growing our team quickly, so we have got a bit of a timeframe condition around people’s purchase. So we don’t want someone coming in six months and being offered equity. We had initially a five year timeframe, but that was too long. That was a key learning for us because some really talented people joined our firm and in fact, I can say that three of the five that joined this year have been with us just two years. But they’ve proven in very quick time, not just how capable they are from a technical standpoint in terms of their role, just their behaviour, their cultural contribution has been tremendous. So we are really looking to find as the people come through, say we want these people to stay. These people are terrific. They bought in from day one, but all their behaviours were in line with what we would’ve hoped from a long-term employee and they were there two years and prove themselves in that timeframe.
So we are putting a little more structure around that. So there’s a bit more of a matrix around behaviour and skills. So we can actually do an assessment of behaviour and skills because there’s been a bit more at director level discretion and we want to try and be a little more leer about what it would take to be invited in. And so people otherwise are thinking, well, I think I’m doing good work. How is it I’m not being invited in? And I think that’s some of the stuff that we want to be better at because we don’t want people to be in the dark as to perhaps why they’re not being asked to take a stake in the business. So that’s something we’re working on at the moment, but I’ve got a pretty good handle on how that’s going to look. And that was my quarterly rock this quarter. It’s 10 days from the end of quarter and I’ve pretty much broken the back of that plan. So we’ll incorporate that. Yeah,
Ben Calder:
That’d be a couple of hours before I reckon, not 10 days before.
Rob Pyne:
I sort of put a lot of time aside in early this month and stayed at home and worked on it because when you’re doing project level work, it needs a bit of uninterrupted time, but we’ve made some good progress there and I feel like we’ve got a good plan as to how we’ll execute on that and just give people more clarity. It’ll actually apply to salaries and remuneration modelling as well. So it’s very much the same matrix of behaviour and skills. We’ll have a remuneration model around that to say, how would I get a pay rise? What would it take and what does it look like? What are the bands? And we want a combination of both skills and behaviour to contribute to that remuneration review every year. The remuneration review or the model will actually be, the behaviour piece will be a 360 feedback, and the skills is more of a manager-level performance review. So it’ll be a combination of those two things that’ll contribute to people’s determination as to whether they’re the right fit to be invited in the plan.
Ben Calder:
And then talking about that with performance once they’ve bought in. Say you had someone buy tranche last year, they automatically get to buy new T tranches in the following years, or is it still linked to if there was some KPI performance issues?
Rob Pyne:
That is a great question, Ben. It actually has happened and the answer is that not invited to participate in the year where they’ve had some performance issues. So they’re still in the plan. They have a stake from maybe two years ago,
Ben Calder:
They’ve either paid money or whatever.
Rob Pyne:
Yeah, that’s right. So that’s still there and that tran stands alone and it’ll keep growing like the original purchase. That’ll still be a success hopefully for them. But we then don’t allocate them an amount of that pool of capital that’s able to be purchased. They don’t get allocated that amount. And that’s something that they’re not surprised by because everyone knows how they’re performing and if they aren’t, didn’t have a good year for whatever reason, and it could be a number of different things. It could influence that. It could be family situation that’s really distracted them. And that has been the case. In one instance, this last round, someone had one of our team members who we really value has had some private challenges, family related that actually have meant that they haven’t been able to be as effective as they would like to have been. And we had a just pretty open conversation about that and they accepted that. So yeah, that’s definitely how we treat it each year.
Ben Calder:
So that tranche that gets allocated for this year, that’s based on what you think the organic growth of the business has been for the year and half of that is being made available to buy?
Rob Pyne:
Correct. So
Ben Calder:
That’s where each tranche comes from. So if you had a flat year for whatever reason, I don’t know.
Rob Pyne:
Yeah, there’d nothing, there’d be nothing available.
Ben Calder:
So it is sort of growth. It is growth orientated. There’s no more shares to buy if you don’t grow.
Rob Pyne:
Exactly right. There’s nothing to purchase if we don’t grow.
Ben Calder:
I think I missed that before the importance of that I think. Yeah, that’s really good because that’s what we just want to align up to growth. Don’t just buy in and it stay the same. There’s no point selling anything. Do you know what I mean?
Rob Pyne:
Yeah. So I mean that’s a great insight. You’ve just sort of gathered there, but it’s built, designed to be a growth engine that is if you help it grow and the business grows and you get your opportunity, if you don’t grow, then yeah, there’s nothing to buy. Yeah. But that’s exactly it. Does that help?
Ben Calder:
Yeah, that’s heaps. That’s enough, Rob. Just take it easy. Yeah, no, it’s really good.
Rob Pyne:
You ask good questions. You’ve actually uncovered a lot limited time, but you ask good questions.
Ben Calder:
Well we’ve, I’ve been thinking about it ages and with lots of other things that you and I have discussed over the years. I’d like to do a lot of research before I pull the trigger on anything probably to my detriment. But anyway.
Rob Pyne:
No, but you’ve got obviously key people in your business too that you want to retain a reward and one of them sitting to your right immediately to your right. So I know that it’s been something you and I have talked about which right.
Ben Calder:
Yeah, absolutely. Absolutely. And that’s part, I think initially I was thinking I want it to be available for leadership. We’ve made to, I think we were talking about inter team structures and we’ve gone to diamond teams. I think we’re probably going to about to move to house teams, but those heads of house, they’re going to run those teams day to day so that I don’t have to, or Ivana doesn’t have to, et cetera. So there needs to be some good incentive for them to do that really well.
Rob Pyne:
Yeah, for sure. So I know you’ve been thinking about it for a while. We were talking about it with you some months back, so yeah, it might’ve even been
Ben Calder:
Thinking about this for three years. But yeah, I did a session with succession, I think I was telling you. We went week and just a few light bulbs went off for me on that employee unit trust structure and just see however it is, whether it’s your unit trust or it’s just a neat way of having rules around everything because I don’t know, I would still banks a second generation Calder, I would like to hold a good percentage of the company for a long time to come yet.
Rob Pyne:
Yep, for sure. No, that’s right. I mean hold for the growth that you’re helping to contribute to, but also have others who are being a part of it, get a share of it,
Ben Calder:
You won’t see them or do awesome out of it as well. Yeah,
Rob Pyne:
And that’s the thing. I mean, you get to a stage in your career where the greatest satisfaction is not just what you personally make from the business that you’ve helped create and grow, but actually seeing other people just have the faith in you and what you do to help them get their own personal objectives met too. So it’s,
Ben Calder:
Yeah, that’s the best thing. I reckon the sort of my last five years, that’s the thing I’ve enjoyed probably the most is seeing that. And that’s without employee share scheme, but that’s just seeing staff who’ve been with you a long time, really kicking big goals now and really standing up and leading and doing well financially and all that sort of stuff as well.
Rob Pyne:
Yep. It is definitely the most enjoyable part. Seeing people succeed from something you have helped them to get access to and that they’ve helped grow. So I am super pleased with our employee share plan. It’s something that has worked tremendously well for us and we see it being a massive part of our future and continuing to grow the business. So yeah, it’s a good plan
Ben Calder:
And it’s really, I think we’ve had discussions as well, and everyone, it’s probably something if you didn’t want a capital partner in your business, but reasons you sort of mentioned before, it’s a good way of extinguishing that long-term debt so you can increase your runway to do more of the right deals when they present themselves too. Right?
Rob Pyne:
Exactly right. Yeah, it’s a good formula that people are buying in or taking a stake in something that’s growing. They’re paying off debt allows you to buy more, which they can also benefit in, taken a stake in it. So it’ss working tremendously well, and I can’t foresee at this stage at least, I can’t predict the future, but I don’t see it how it’s going to sort of become a problem structure for us either. I think it’s got, it just seems like it’s got legs long-term to be a Yeah,
Ben Calder:
Look, it’s just really if everyone said they wanted out the same day or whatever, but
Rob Pyne:
Yeah, but if they did that, then of course you’d sell out to a,
Ben Calder:
Yeah, you would do just take institutional shareholder or something, or
Rob Pyne:
That’s right. And that’s where you get the tag along drag along stuff happening, obviously inside your unit trust, shareholder unit trust holder agreement. Because we also want to be mindful that if the first generation directors all sell out within two years, the second generation guys sell out to a big insto and get paid a significant multiple north of what we sold it to them for. It might be something that’s the first generation guys go, that wasn’t the plan guys. But that’s something where, yeah, we haven’t really thought about how to solve for that, but we are thinking about that one because we want it to be in the hands of a number of our staff. So much that, I mean, we’ve seen samples of that, examples of that happen in engineering firm that I know in Perth year that sold out, I won’t name names, but yeah, that did, that first generation guys sold internally. Second or third generation sold out externally and might’ve been a bit of a first generation guys might’ve felt like had I known you we’re going to do that, I might’ve been a part of that, got the higher multiple. So yeah. Alright.
Ben Calder:
Okay. That’s really good. Thanks for that. Thanks for sharing all of that. Thanks for your time.
Rob Pyne:
No worries. Good luck with it guys.
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