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01 Jul 2016

Smooth sailing: employee share ownership is easier than you think

By Alex Tilley

An employee share ownership plan (ESOP) is an arrangement under which an employee is provided with shares, or the opportunity to buy shares, in the company they work for. Participation in an ESOP transforms an employee into a part owner; increasing employee engagement, productivity, and retention in a way that no other form of remuneration can compete with. When a plan is structured correctly, business owners can provide equity to their key employees with no adverse tax implications.

 

A key benefit of employee share participation is the alignment of employer and employee interests. Though not always measureable, significant costs to the company are incurred when the interests of the employee are not congruent with those of the company. Most notably the impact can be seen in low productivity, low employee morale, and poor employee retention. Additionally, customer satisfaction is directly influenced by employee satisfaction. Unless a business ensures its employees feel engaged, valued and satisfied, it is unlikely to have customers that feel engaged, valued and satisfied. It goes without saying that a company’s greatest asset is its employees, and a great company nurtures great employees who do great work.

 

Imagine two boats. The captain of the first boat is motivated, hardworking, and has a clear understanding of where his boat is headed. His crew however, aren’t clear on where the boat is going and they don’t really care, they get paid just for showing up. On the second boat, captain and crew share the vision of where their boat is headed, each member working as hard as the next to reach their collective destination. The captain of the first boat is equally as keen to reach his destination as the captain of the second boat, but with a disconnected and unenthusiastic crew, he is unlikely to get there. Ask yourself, which boat does your workplace resemble? Are your employees truly “on board” with the company’s objectives?

 

In many companies, employee retention is a critical issue. Without an effective talent management strategy, a company can easily lose big money replacing employees who have “jumped ship”. According to Josh Bersin, Principal and Founder of Bersin by Deloitte, “Many studies show that the total cost of losing an employee can range from tens of thousands of dollars to 1.5-2X annual salary.” Not to mention the damage done to productivity, employee morale and workplace culture. Whilst the costs of recruiting and training a new employee are easily measured, the true impact of high employee turnover on productivity, morale and workplace culture is less calculable, but can be equally damaging to a company. Even with quality initiation and training, a new employee still may not reach the productivity levels of their predecessor for several years. This is not necessarily a reflection on the individual, rather the simple fact that the longer an employee is with an organisation the more productive they are likely to be. It takes time to learn a company’s systems and products, and to build relationships within the organisation with suppliers, customers etc.

 

Most new employees will be a cost to the business before they become valuable. In addition to this, high employee turnover distracts from the company’s long-term objectives and hurts business. Talent retention is a crucial element of business success, so how do we ensure it? Employees expect to be financially rewarded for their work, and financial incentives such as commissions and bonuses can be effective, but even companies with higher than average wages, bonuses, and commissions still experience issues with employee retention. Research suggests that employees are seeking more than just financial remuneration from their company; they want to influence the management of the company and have a say in the decisions affecting daily work, they want fair treatment and a sense of community. Employee share ownership is an immensely powerful strategy for satisfying these criteria and ensuring your valued employees don’t “jump ship”. When employees feel they have a direct interest in the performance of the enterprise, their commitment to the company and the objectives of the company is greatly enhanced. ESOP’s facilitate employee engagement in the company and provide incentives for employees to achieve high levels of productivity. As part owners these employees don’t just expect a return from their company in the form of salary, they want to contribute.

 

Despite this, the perceived complexity of employee share ownership is still holding some businesses back from realising the numerous benefits of implementing an ESOP. ESOP’s have been criticized as being legislatively problematic or administratively demanding, but carefully designed policy can address each of these shortcomings. The benefits of employee share ownership are dependent on the strategic design, implementation and management of the ESOP, as well as adherence to relevant legislation. This should not be a deterrent to companies however, as these administrative and legislative ‘hurdles’ can be managed by competent Advisers and Administrators. Relieved of these burdens, companies and their employees are free to realise the immense benefits of employee share ownership.

 

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