One of the most intriguing nuggets in the recently published Irish Software Association’s Digital Technology Index (DTI) is that, despite everything we are being told and that we know from anecdotal evidence, ironically finding finance is now easier than finding key staff. More than 60 per cent of respondents were positive about the availability of money, but only 49 per cent were positive about being able to hire talent.
This fact – and the wider struggle that indigenous software firms face in recruiting and retaining key talent should be seen against the size of the wider technology sector. The broad sector employs 90,000 people across a range of companies with everything from start-ups and SMEs right to the Googles and Facebooks of this world.
And it’s these ‘big boys’ that can skew the market. Pitted against huge multinationals, with their seemingly unlimited resources, what can indigenous firms offer key staff as a recruitment and retention incentive? The simple answer: a stake in the company, offering the potential of a far higher upside than would be available with the large FDI employers. Equally importantly, it changes the employee’s status from ‘worker’ to ‘boss’ and that makes a difference to those people that can be far greater than its monetary value.
Providing some form of employee equity involvement could be the most powerful weapon for David’s slingshot against Goliath, in helping indigenous firms attract the highly skilled staff that they need.
We all know that without the correct staff and without the correct skill mix our native companies will not be able to reach their full potential and that there will always be a ceiling on their growth. That doesn’t just stop those companies growing.
By inference, this also puts a major tether on the economy as a whole.
In general, shareholders in technology companies, be they the original promoters or venture capitalists, have an exit strategy in mind when they sign up; by either trade sale or flotation. Employees who have a stake in such companies can have an obvious upside where the company is sold for a profit. On top of this it’s also an extra and extremely important incentive to join a company in the first place, to work hard and to stay with such company even if things are not going that well for a period. This is why staff turnover in employee owned companies is much lower than in traditionally owned businesses.
To whet the appetite, it’s estimated that at least 1,000 Facebook employees became instant millionaires (and more) when the company floated in May 2012. Such examples are a big motivator for getting key staff to work for smaller companies rather than opting for the larger initial salaries at larger companies. The government here has stated that it would love to grow the next Google or Facebook in Ireland. But this is highly unlikely to happen without effective equity incentives.
In the DTI survey the Irish Software Association says that up to 4,500 jobs are unfilled due to skill shortages. It’s also felt that those that can pay the best will get the best. This presents a major challenge not just for the IT industry but for the economy as a whole.
Some 72 per cent of respondents in the DTI survey said that deferring income tax on share options until the shares are disposed of would make it far more effective for their companies to attract and retain key staff. But there’s a massive problem with these share options as a substantial tax liability of 52 per cent is triggered when the options are exercised. This level of tax is tolerable but the big problem is that this tax could fall due even before the shares are actually sold. This leaves the employee with a substantial tax liability and most likely no way to finance it.
For many years the Irish ProShare Association has been calling for the tax liability on these share options to be deferred until the gain is actually realised and not just when the option is exercised. The immediate benefit of such measures is apparent to us and now nearly three quarters of the respondents to the DTI are saying the same thing. They say that it would be a significant advantage for staff recruitment and retention if the tax liability on these measures could be deferred, especially for High-Potential Start-Ups (HPSUs).
One of government’s roles is to enable businesses to be innovative and creative so as to encourage economic growth. However in its current form the legislation on employee equity incentives is actually restricting the ability of our indigenous companies. The upcoming budget should address this simple anomaly. There’s no loss to the exchequer in doing this because as things stand the incentives aren’t being taken up as taxwise it’s not worth it.
As any farmer worth their salt will tell you, ‘you need to have your duck before you can pluck it’. If addressed than it will instantly remove a major roadblock to innovation and enterprise.
Cormac Brown is a council member of the Irish ProShare Association; ipsa.ie