Implementing an appropriate and effective remuneration and incentive policy for management and employees is a key driver for a successful business. Traditionally, incentive plans have included bonus schemes, share option schemes and other share-based arrangements. These plans can be used to strategically incentivise certain employee behaviours, though they are not without their drawbacks. We routinely advise our clients on how to design and implement plans which are right for their business, though even non-discretionary bonuses can be intensely political affairs in practice, while share-based arrangements dilute the founders’ ownership while sometimes muddying companies’ decision-making processes.
Blockchain technology is a fascinating and ingenious branch of computer science which enables data to be digitally represented and the transfers of that data to be verified and recorded by network participants, i.e. each computer connected to the blockchain, known as ‘nodes’. This technology famously underpins most modern cryptocurrencies such as Bitcoin, but it also has a huge number of potential applications in other fields, including in the establishment and administration of an employee incentives plan.
Blockchain-based incentives plans can range from simple tokenisation of traditional benefits (i.e. digital tokens which represent or are convertible into ‘real world’ assets such as shares, bonds or currency) through to sophisticated and complex platforms which are capable of fully automating the personalisation and administration of employees’ benefits in an objective and cost-effect way. Whichever form such incentive plan takes, the following characteristics of a blockchain platform ring true:
- They are secure. Through clever combination of advanced cryptography and simple consensus protocols, blockchains are a secure means of electronically storing data. In the context of employee incentives plans, this provides comfort to both employer and employee that the relevant personal data is maintained in a more secure manner than traditional computerised HR systems.
- They are decentralised. In order to commit data to a blockchain, it must first be verified by the network of nodes using the relevant consensus protocol. Modern blockchains can also enable the siloing of network participants’ data access to ensure that they only have access to the data they are permitted to see. In the context of employee incentives plans, this provides comfort to the employee that the distribution of benefits is conducted in a fair and objective manner, while providing comfort to the employer that its employees will not have unauthorised access to each other’s personal data or remuneration packages.
- They are adaptable. Blockchain platforms, like businesses, are not ‘one size fits all’. They can be designed to accommodate a wide range of competing outcomes and features. Blockchain platforms, in their various guises, can provide liquidity to employees in closed, secondary markets, dramatically reduce incentive plan administration costs, enable real-time payroll access and demystify the murky world of employee bonuses.
A blockchain-based incentives plan should be a serious consideration for all businesses, from young, innovative and high-growth companies through to large, public listed companies.
Successful companies attract, grow and retain top talent, but this can be extremely challenging for young companies who do not have the cash-flow to match their bigger, more established competitors on salary. A blockchain-based incentives plan which aligns with the company’s wider strategy can be extremely useful in this regard – properly recognising the important role that employees play in the early life of a company, while freeing up capital for reinvestment in the company’s core business. Companies may consider offering tokens to their employees, which might be convertible into real world assets or currency on certain events, such as the meeting of annual targets, the passing of time or the sale of the company. The company may also permit those tokens to be traded on an internal marketplace for real currency, providing its employees with greater liquidity as compared to traditional share-based arrangements. Of course, token-based incentives plans also have the benefit of not diluting the founders’ shareholding.
Traditional share incentives structures can often prove cumbersome and expensive and this is never truer than for large companies, especially those listed on a public market. By adopting a blockchain-based incentives platform these companies can dramatically cut administration costs while offering their employees greater flexibility and insight into their benefit entitlements. The immutable, secure nature of a blockchain also provides a verifiable audit trail which can be of tremendous value from a compliance perspective.
Creative solutions can also be designed to structure incentives for growth share plans and other security based tax efficient incentives, which may or may not be disclosable to the network participants or employees or members of the incentive pool.
Mishcon de Reya has a dedicated Blockchain Group which have deep market expertise and are able to advise our clients on all aspects relevant in the space. Together with our Incentives & Remuneration Group, we can talk our clients through the various considerations involved in adopting a blockchain-based incentives plan and design and implement platforms and packages which are right for their businesses.
If you have any questions on this article or are interested in adopting a blockchain-based incentives plan, we would love to hear from you. Please contact either Tom Grogan or Stephen Diosi for more information.