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The debate of BEE ownership schemes involving staff still rages on. With the release of

the final BEE codes of good practice the issues that are emerging are about non-black and

black foreign staff receiving shares as a result of BEE and the issue of how those sharesget allocated.

Before the issues are unpacked it is important to clarify what we mean by black people.Black people are defined as Africans, Indians and Coloureds who are natural person and

who are South African citizens by birth, descent or became naturalized prior to the

effective date of the interim constitution of 1993. Furthermore this definition includespeople who acquired their citizenship after 1993 but would have qualified for citizenship

before 1993 if the apartheid regime was not in place. This is a stricter test of the

beneficiaries of BEE.

The other principle that is important for this discussion is the flow-through and the

modified flow through principle. The flow through principle measures the true economic

benefits that flows to natural black persons from the measured entity. Therefore the more

structures are put in between the measured entity and the black person the more potentialdilution there is to the economic benefit flowing to black people. The modified flow

through principle allowed for financing by third parties who are not necessarily black inorder to ease the financing crunch faced by many black entrepreneurs by classifying one

level of ownership to be 100% black. In measuring the points awarded to black women

and black designated groups the modified flow through principle does not apply becausetheir ownership are already low at 10% and 2.5% respectively and applying the principle

could effectively half those targets.

The conflict that faces companies is how allocate the shares to black people withoutalienating their white staff and other black people who do not meet the definition of

black. Some white employees feel hard done by the allocation of shares to their blackcolleagues because they also work hard and do not receive the rewards of that hard workthrough the allocation of shares. This sentiment is also shared by black people who do not

qualify because they are foreigners. Furthermore the some people get further annoyed by

allocation of shares to naturalized foreigners that receive shares because they seem totake precedence over white females who were discriminated against even though it was

not legislated. Therefore the pressure is on the companies to manage those conflicts

constructively.

So in trying to resolve the conflicts companies would allocate shares to all employees and

hope to use the modified flow through principle to get points on the economic interest

flowing to black designated groups and the bonus points for their employee schemes. Themodified flow through principle does not apply to score points on the above criteria as

there is a move to calculate the true economic benefits accruing to black people within

those groups. The financing of employee schemes is done by the company and the non-black employees actually do not put the financing for any of the shares therefore the

modified flow-through does not apply. In essence the more there is non-black employee

participation the more dilution there is on the flow of economic benefits going to black

people as defined. For business reasons some companies are willing to dilute on the

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points they can earn on BEE by including their non-black employees but the dilution is

not very big. This is to ensure the harmonious working environment. The ultimate reality

is that a greater proportion of the shares in a BEE scheme involving employees would beallocated to black people in the region of at least 80% to 90%.

Most companies have not discontinued their normal share incentives schemes that havetraditionally favoured their white employees. The companies realize the distinction

between the shares allocated for BEE purposes and those allocated for underlying job

performance. Increasingly there is a linkage between the shares for BEE purposes and theunderlying performance by those people receiving those shares. Where there is

performance linkage there is no upfront cash paid by those employees for their shares

because they would have earned them by performing well in their jobs. Where there is

cash to be paid the employees for their BEE shares there is no question of linking that totheir underlying job performance.

Companies must be very cautious about the allocation criteria of those shares not to be

too cumbersome to such an extent that no shares actually get allocated to black people fora number of years. For the employee BEE share schemes to be effective as part of a

retention strategy the period of allocating those shares must be short and there could bereasonable lock-in period introduced to make sure that the employees can be retained. If

one sees unallocated shares in a BEE scheme for a period exceeding three years then

questions around fronting does arise in ones mind especially in deals involving where asubstantial amount of shares goes to employees. The warehousing of BEE shares for

employees which is not linked to departing employees may lack credibility and could be

seen as a circumvention of the spirit of BEE.