“Trust is a non-negotiable element of financial systems.” - Hendrith Vanlon Smith Jr

Today's business environment is hyper-competitive.

To keep your business successful, you must consistently attract and retain top talent.

To achieve this, one of the most popular financial solutions you can use is share-based payments to incentivize your staff to work towards long-term growth and profitability.

However, the valuation and reporting of these payments can be complex and non-transparent. Without strong risk monitoring, they can introduce financial risks to your company.

In this blog article, we will explore how strong risk monitoring strengthens share-based payment transparency, builds trust in financial markets, and leads to sustained growth for your company.

The role of strong risk monitoring in financial transparency

Think of risk monitoring as a regular health check-up for your finances.

Just as you visit a doctor to catch potential health issues early, tools and techniques of risk monitoring help you spot financial risks before they become significant problems for your company.

These risks can come from various sources, such as market fluctuations, operational hiccups, or regulatory changes.

Here’s why risk monitoring is so crucial:

• Prevention: It helps you identify risks early, allowing you to take proactive measures.
• Minimization: It reduces the potential impact of risks on your financial stability.
• Compliance: It ensures your company adheres to legal and regulatory requirements.

When you monitor risks effectively, you can provide accurate and reliable information to your stakeholders, including investors, employees, and customers. This builds trust and transparency, as people feel more confident when they know what’s happening behind the scenes.

Here’s how risk monitoring contributes to transparency:

• Accurate reporting of your financial reports to reflect the true state of your company
• Informed decision-making based on a clear understanding of potential risks - leading to more predictable and stable outcomes.
• Increased stakeholder confidence, trust, and willingness to invest in your company’s future.

Risk monitoring and corporate governance have to work together.

Corporate governance is like the rulebook for how your company is run. It involves the systems, principles, and processes by which your company is directed and controlled.

Good governance ensures that your company is managed in a way that’s accountable, fair, and transparent.

Here’s how risk monitoring and corporate governance support each other:

• Accountability: Everyone in your company will know their responsibilities and be held accountable for managing risks.
• Ethical practices: Strong risk monitoring aligns with ethical business practices - a core aspect of good corporate governance.
• Decision oversight: Effective governance involves oversight of major decisions, and risk monitoring provides the data needed to oversee these decisions wisely.
• Regulatory compliance: Both risk monitoring and corporate governance ensure that your company complies with all relevant laws and regulations, avoiding fines and legal issues.

What are share-based payments?

Share-based payments give your employees part-ownership of your company.

Share-based payments are a form of compensation where you offer your employees shares of your company as part of their pay.

This means that instead of just receiving a salary, employees also get a stake in the company, which can motivate them to work towards the company's success.

With share-based payment to staff, your company gets to attract the best talents and increase employee retention while further aligning your staff and your company’s goals.

For your staff, there’s a potential financial upside, a sense of ownership, and strategic long-term benefits that keep them constantly motivated.

Here’s a list of share-based payments:

• Stock options: Stock options give employees the right to buy a certain number of shares at a fixed price (known as the exercise or strike price) after a specified period. If you offer your employee stock options at $10 per share, and after a few years the share price rises to $20, your employee can buy the shares at the lower price and potentially sell them for a profit.
• Restricted stock units (RUUs):  RSUs are company shares given to employees as part of their compensation, but they come with restrictions. Typically, the employee must stay with the company for a certain period (the vesting period) before they can own the shares outright. If you grant an employee 1,000 RSUs, they will receive these shares only after working for the company for a set number of years.
• Employee stock purchase plans (ESPPs): ESPPs allow employees to purchase company shares at a discount, usually through payroll deductions over a set period. You might let employees buy shares at a 15% discount off the current market price.

With share-based payments, certain challenges and risks exist.

For companies, this often comes in complex valuation, dilution of shares, and regulatory compliance.

For employees, they could be risking fluctuating stock prices, tax consequences, and a minimum vesting period to receive their shares.

To keep your share-based payment program transparent, you must employ risk monitoring strategies.

Strong risk monitoring strategies in share-based programs begin with identifying potential risks.

They include:

• Market risk: This is the possibility that the value of the shares will fluctuate due to market conditions.

For example, If your company’s stock price drops significantly, the value of stock options or RSUs granted to employees decreases, potentially leading to dissatisfaction and decreased morale.

To manage market risk, you need to regularly review market trends, perform scenario analysis, and maintain open communication with your employees about potential market fluctuations and their impacts.

• Operational risk: This involves the potential for losses due to failed internal processes, systems, or external events. In the context of share-based payments, this can include errors in granting shares, processing transactions, or maintaining accurate records.

For example, an error in the software used to track employee stock options could result in incorrect reporting and compliance issues.

Managing operational risk requires implementing robust internal controls, regular audits, and staff training can help reduce operational risks.

• Regulatory risk: This refers to the potential for changes in laws and regulations that govern share-based payments. Non-compliance with these regulations can lead to legal issues, financial penalties, and reputational damage.

For example, changes in tax laws affecting how share-based payments are treated could alter the financial benefits for your employees and increase your company’s tax liabilities.

Managing regulatory risk requires staying informed about relevant regulatory changes, consulting with legal and financial experts, and ensuring your policies are always up-to-date and compliant.

To effectively manage the risks associated with share-based payments, it’s essential to establish strong internal controls and compliance measures.

This begins with establishing comprehensive policies for your share-based payment programs including guidelines for granting shares, implementing IFRS 2 share based payments, setting vesting schedules, and following regulatory requirements.

In addition, you should include:

• Regular audits (internal and external) to identify potential issues early and take corrective actions promptly.
• Employee training and education to your staff involved in managing share-based payment programs.
• Accurate and up-to-date documentation of all share-based payments, including grant details, vesting schedules, and transaction histories for transparency and compliance reporting.

To increase the effectiveness of risk monitoring, you can leverage advanced technological tools and systems to improve accuracy, efficiency, and transparency.

This involves:

• Data analytics: You can use data analytics to track stock price movements, employee exercise patterns, and overall program performance. This can help you identify emerging risks and take proactive measures.
• Artificial intelligence (AI): AI can automate various aspects of risk monitoring, improving efficiency and accuracy. AI-powered systems can automatically detect anomalies in share-based payment transactions, flagging potential errors or fraudulent activities for further investigation.
• Software solutions: There are various software solutions available that can streamline the management of share-based payment programs. For example, implementing specialized software for equity management can help you maintain accurate records, automate compliance reporting, and provide real-time insights into your share-based payment programs.

Best practices for strengthening risk monitoring of share-based payment

Developing a solid risk management framework is the foundation of effective risk monitoring.

Risk monitoring provides a structured approach to identifying, assessing, and managing risks associated with your share-based payment programs.

To create a risk management framework, you will need to:

• Identify potential internal and external risks related to your share-based payments, such as market, operational, and regulatory risks.
• Assess the likelihood and potential impact of each identified risk. This helps you prioritize which risks need the most attention.
• Develop and implement controls to mitigate the identified risks. These can include policies, procedures, and technological solutions.
• Continuously monitor your risk management activities, regularly review your framework to ensure it remains up-to-date, and make adjustments as needed.

A critical aspect of keeping your share-based payment programs compliant and functioning as intended is regular audits and assessments.

They help ensure compliance with regulations and internal policies, identify potential problems before they become significant issues, and improve transparency by providing a clear, documented overview of your share-based payment activities.

You can conduct your audits internally or externally.

With internal audits, it’s much easier and allows you to check compliance and identify areas for improvement frequently.

External audits involve periodically bringing in external auditors for an unbiased review of your programs - providing valuable insights and increased objectivity.

Your employees play a critical role in the success of your share-based payment programs. Providing them with the right training and education ensures they understand compliance requirements and ethical standards.

During training, it’s important to focus on laws and regulations, your company’s policies and procedures, ethical behavior and integrity, and practical training on relevant software tools.

The benefits of employee training and education include:

• Increased compliance with regulatory requirements and internal policies.
• A culture of integrity and accountability within your organization.
• Improved staff management of your share-based payment programs

Maintaining open communication with stakeholders is essential for building trust and ensuring the success of your share-based payment programs.

Your stakeholders include employees, investors, regulatory bodies, and other parties interested in your company’s financial practices.

Engaging your stakeholders involves:

• Transparency on how your company’s share-based programs work, their benefits, and any associated risks.
• Regular updates on the status and performance of your share-based payment programs. This can include quarterly reports, newsletters, or dedicated meetings.
• Feedback channels for stakeholders to provide feedback and ask questions. This can help you identify potential issues and areas for improvement.
• Collaboration in the development and review of your share-based payment programs. Their input can provide valuable insights and help ensure the programs meet their needs and expectations.

The importance of strong risk monitoring for share-based payment transparency

When it comes to running a successful business, trust is everything.

Your employees, investors, and other stakeholders need to feel confident that your financial practices are transparent and reliable.

Share-based payments, like stock options and RSUs, are fantastic tools for rewarding and retaining top talent, but they come with their own set of risks.

By implementing strong risk monitoring, you can ensure these programs are not only compliant but also fair and effective.

When your stakeholders see that you're proactive about monitoring and managing risks, it reinforces their confidence in your company's integrity and financial health.

Frequently Asked Questions:

How does strong risk monitoring benefit share-based payment programs?

Strong risk monitoring ensures that share-based payment programs are transparent, compliant, and effectively managed. By identifying potential risks early, companies can take proactive measures to mitigate them, leading to accurate financial reporting, informed decision-making, and increased stakeholder confidence.

What are the main risks associated with share-based payments?

The main risks include market risk (fluctuations in stock prices), operational risk (errors in processing transactions or maintaining records), and regulatory risk (changes in laws and regulations). Effective risk monitoring helps manage these risks by implementing robust internal controls, staying informed about regulatory changes, and using advanced technological tools.

How can companies ensure compliance in their share-based payment programs?

Companies can ensure compliance by establishing comprehensive policies for granting shares, setting vesting schedules, and following regulatory requirements. Regular audits, both internal and external, help identify potential issues early. Additionally, accurate documentation of all share-based payments and ongoing employee training are crucial for maintaining compliance.

What role does corporate governance play in risk monitoring?

Corporate governance provides the framework for how a company is directed and controlled, ensuring accountability, fairness, and transparency. Risk monitoring supports good corporate governance by aligning with ethical business practices, providing oversight of major decisions, and ensuring regulatory compliance, thereby enhancing overall trust in the company's financial practices.

How can technological tools enhance risk monitoring for share-based payments?

Technological tools such as data analytics, artificial intelligence (AI), and specialized software solutions can significantly enhance risk monitoring. Data analytics helps track stock price movements and identify emerging risks. AI automates various aspects of risk monitoring, improving efficiency and accuracy. Specialized software streamlines the management of share-based payment programs, ensuring accurate records, automated compliance reporting, and real-time insights.