Using shares to attract and retain top talent

Business owners should consider issuing shares as a strategy to attract and retain employees, Toronto business lawyer Anton Katz tells AdvocateDaily.com.

“With advantages for both employees and employers, it would be beneficial to most — if not all — businesses to at least consider offering employees a stake in the corporation,” says Katz, principal of Anton M. Katz Barrister and Solicitor.

But, he says it’s important for employers to consider retaining control of the company when they go down such a road.

“To strike that balance between control and profit-sharing, the owner could file articles of amendment, creating a second class of shares. The owner could possess common shares and the employees could be given preferred shares.”

The preferred shares would be non-voting but still entitle the employee to discretionary dividends. While everyone within a certain class of shares has to be treated equally, Katz said dividends can vary between groups of shareholders.

“That means the owner, who is the sole director, has complete discretion over which class of shares she declares dividends on. She may choose to declare dividends on the common shares and, therefore, only to herself. She also has control over the amount of dividends declared,” Katz explains.

Another benefit for companies is that they can pay dividends when times are good, yet they aren’t obligated to when times are tough. Such an incentive program also has built-in motivation — if a company does well, shareholders will reap the rewards.

For companies considering such a move, Katz says it’s useful for them to create a shareholders’ agreement.

“That agreement would make it crystal clear that the owner is the sole director and has all decision-making power. It could go on to say that if the company is ever sold, the preferred shareholders would be compelled to be dragged along into that sale.”

That means employees wouldn’t have the power to interfere with the potential sale.

Katz says offering shares as an incentive to employees can benefit a variety of businesses, regardless of size and industry, but he says there are some limitations when it comes to professional corporations. In a law firm, for example, legal assistants and other non-lawyer support staff cannot be issued shares.

“The Law Society of Upper Canada doesn’t allow non-licensees to be shareholders — regardless of the type of shares. They just don’t allow it,” he says.