Why should your company have an Employee Share Ownership Plan (ESOP)?

ESOP ESPP employee incentive compensation

Private, Public or pre-IPO – Employee Stock Ownership is the cost effective way to incentivise, copensate and retain smart people

Many owners want their key management to be both loyal and help grow the company and be rewarded if the business is sold. This Executive Overview shows how you can achieve this for your business and how ESOP World Forum can help you do it better, faster and more cost effectively through access to key information, industry experts and your business peers who have achieved this already.

Employee share plan can motivate staff and improve business performance. If you want to retain key employees, reduce staff turnover costs and reward your employees without reducing company cash reserves, increasing tax costs then an Employee Share Ownership Plan (ESOP) may be your best option. They can achieve all of this with long term tax efficient incentives. But more importantly, when you turn your employee’s into business owners they start acting like business owners – making better decisions for you business. Research (#ref) shows that employee owned companies have higher sales and profits per employee and higher long term success rates than their peers.

In some cases existing shareholders may not want to give them actual shares in the company or they may not want them to leave still owning shares in the company so flexibility is crucial. Employee share plans can be this flexibility and can allow anything from a small group of key individuals to the entire workforce to be offered direct shares or share options/incentives in a tax efficient manner.

Although the rules vary by country and company types employee ownership plans can be implemented in private companies, public companies, pre-IPO companies and semi-state companies.

What are the corporate benefits of employee ownership compensation and incentives?

Good reasons for setting up an employee ownership plan are to

  • motivate your employees to become more productive and make better decisions
  • align employees’ interests with those of business owners, management (and shareholders if the company is traded publicly)
  • recruit or retain key employees, increasingly loyalty and reducing staff turnover costs
  • compensate employees without raising salaries (with associated tax, insurance and pension costs) and relieve pressure on cashflow
  • reward employees in a tax-efficient way
  • potentially raise working capital
  • realise some of business owners’ investment

Business owners should be aware of the following issues before  putting employee ownership in place:

  • The effect on morale and retention if the share price falls – particularly for share option schemes
  • Administration costs – set up and approval, plus long-term costs of managing and record keeping
  • Dilution of share ownership – and the need to keep lose control of the business (retaining minium per cent of the voting shares to control important company decision making)
  • Risk of arousing unrealistic financial rewards expectations among employees
  • For private companies the need to run an internal market for the shares, (such as an employee benefit trust) so employees wanting to sell their shares without a public stock exchange