Business Owners: Employee Ownership Plans come under different names in different countries, (CSOP in the UK, SAYE in several countries, SIP in others) here we use ESOP as a generic term to refer to all Employee Share or Stock Ownership Plans.
If you are a business owner, founder, major shareholder or senior executive considering if employee ownership or looking for better employee compensation alternatives then ESOP World Forum can provide you with independent information and access to expert to assist your decision making process. You can access an introductory level of information for free. Should you want to access more in depth in information, including education materials or get advice for our expert members including expect in your area then our Executive Membership will prove excellent value, not just now, but through your ESOP implementation process and to maximize the value from your ongoing administration.
Why consider an ESOP?
The goals and benefits of employee ownership can depend on company type and owners strategy. Here is a summary of reasons to consider an ESOP for you company. ESOP World Forum membership gives you access to industry thought leaders and experts in ESOP setup, finance, tax, legal and administration in countries around the world to get you the right solution for your company.
Private Company: You want to retain key employees, reduce staff turnover costs, reduce tax (income tax, corporation tax and capital gains tax) costs and increase employee participation in the company then an ESOP can be a good solution. Contrary to what you might think you can have the benefits of an employee stock ownership plan without public trading by creating an internal market in the company shares.
Post Startup Company: You want to grow the company and retain key employees without committing large amount of cash flow to bonuses and pay rises (and the resulting tax costs) and you want your employees to act like business owners making better business decisions then an ESOP can be a good solution. You can allocate part of the company for employees to share in the success either through growth or eventual IPO with an employee share plan, improving your employee retention, reducing your cash flow and your tax bill and aligning employees with your company strategy.
Public Company: You want to reduce your payroll, staff turnover and tax costs and provide employees with tax efficient components of their compensation then an ESOP can be a good solution. Your employees can benefit from the market success of the company and so are incentivised to act in the interest of the owners shareholders like themselves.
Other Companies: There are a variety of other company types – not for profits, semi-state companies, international subsidiaries which may or may not be able to benefit from employee ownership. Ask our panel of industry experts about your company circumstances and eligibility.
Good cash flow and track record of sales and profits. ESOP valuations may focus on discounted cash-flow valuation. Volatile sales and profits create a volatile stock value, which may demotivate employees in less successful times. A decrease in cash flow and a lower employee earning may reduce the contributions to the ESOP, creating additional volatility in the stock price and debt-funding issues for the company.
Good taxable income. Companies in higher tax brackets will obtain the best cash-flow benefit from tax-deductible ESOP contributions. Costs of setting up and operating an ESOP are usually tax deductible expenses. Rules vary by country, see the country specific page for details on the specific tax benefits for your company.
Strong management and key personnel. Many companies rely on a few strong management and key personnel and their retention and succession is an important consideration for business owners. An ESOP can be an effective tool in retaining, motivating, compensating and reward these personnel.
Companies unsuited for ESOPs: In general, ESOPs may prove too costly for very small companies, those with high employee turnover, those that rely heavily on contract workers, or some partnerships. ESOPs might also be problematic for businesses that have uncertain cash flow, high debt management or a complicated group and subsidiary structure.
These are different ways to involve employees in the goals, objectives and success of a business, your business. Incentives to empower and align employees’ decision making bring great benefits to the business – they make better decisions, feel more involved, work more effectively and stick around longer. This is good for business and good for them – a real win-win scenario.
The different names for the various employee share and stock plans can be confusing but ESOP World Forum can help you learn how to find the right solution for you from the best people – those already benefitting from them: business owners, executives, HR and plan administrators and last but by no means least employees and plan participants.
Find out more on on our Stock Plan Overview
How to setup an ESOP
Employee Share Ownership Plans (ESOP) and their equivalents in different countries are widely established (in 2015 over 10,000 companies in the US with over 10.3 million employee members) and long established (since 1957 in the US but with most growth in the 1990s). There is a wealth of expertise in how to setup, administer and optimise ESOPs and you should take advantage of that.
Setup costs for an ESOP can vary considerably but starting from around $40,000 (€30,000) means that they may be more suitable for port-startup and mid-sized companies. But in most cases setup costs are a tax deductible expense.
You will need financial, legal and tax advice based on the rules for your country or state. In some jurisdictions ESOPs need prior approval by the tax or revenue authorities.
You will need trustees to oversee and administer your ESOP and you need to consider their appointment and how they will be compensated.
Your HR and payroll people will need assistance in setting up any payroll amendments and in producing the briefing materials for employees.
The process and steps for for setting up an ESOP (or its equivalent) will be something like this:
1 – Consultation and Planning
You should consult with other shareholders and directors in order to arrive at agreed objectives and timelines for the ESOP. It is also worth considering engaging with employee about their likelihood to engage in an ESOP. In the unlikelihood of low employee enthusiasm for participation then it would prudent to know this before spending the setup time and cost on an ESOP. But bear in mind that the level of employee enthusiasm will be influenced by information provided to them – poor information of the objectives and timelines of the owners will not help employees decision making. Agree the goals with the business owners and then draft the materials for the employee discussions.
2 – Feasibility Study and Design
An ESOP feasibility study typically may include
- preliminary valuation to determine the approximate pricing of the ESOP it part in the stockholders’ equity analysis (how an ESOP would affect existing shareholders the company’s financial performance
- a plan design to determine the ideal transaction structure, plan features, and how it will be administered (the trustees, the qualification rules, rules for leavers, etc.)
- how the plan will be financed and taxed
- it may include some or all of the following (legal advisers, valuation specialists, ESOP consultants, investment bankers, lenders, the senior management team, and the shareholders) or it may simply be all handled by one accounting or legal firm.
Usually at the end of this stage there would be further consultation with owners, existing shareholders, senior management and possibly employees or their representatives before deciding to proceed with the ESOP.
3 – Implementation Planning
To implement the plan, the necessary legal and financing elements have to be put in place, any trustees have to be appointed, where required approval from the tax or revenue authorities gained and any HR and payroll processes put in place (including how the plan will be administered – usually through appropriate software tools which must be evaluated, selected and implemented in time).
Then the employees have to be fully engaged in the process, with the benefits and risks made clear before they sign up to the plan.
You have to decide how employees will get their tax advice on the ESOP and its impact on them. Does the company have the inhouse ability to provide this or is it better to get outside independent tax advisors for employees.
4 – Rollout and Administration
The ESOP can be be rolled out to the employees. Regular reports should be available to the employees to ensure than enthusiasm for the ESOP is maintained and to get employee feed is available and employee concerns addressed. One of the main benefits of an ESOP is the improved performance of the business as employees start to act like owners (or shareholders). But this also requires that the company treats them like owners and shareholders and reports to them regularly on company business and financial matters. This usually generates a better communication and understanding between employees and management with is a further benefit to company performance.
Want more in depth ESOP implementation? Start here
Other ESOP issues to consider
Stock ownership plans come in many forms in a wide variety of businesses and are regulated in different ways in different countries around the world. At ESOP World Forum you can discover how to make employee stock ownership work for you or your business.
Business Owners: If you are considering how to motivate and compensate your employees in the optimum way for your business then ESOP World Forum can help you get the full benefits and background on employee stock and share ownership plans.
Finance, HR or Stock Plan Administrators: If you are designing, implementing or administering a stock plan for your business you can find information to help you do this efficiently, effectively while in compliance with the relevant legal and tax legislation.
Employees: If you are an employee in a company with a stock ownership plan you can find out how to make the most out of your plan and discuss you options with like minded people in our forum.