Employee Share Ownership
Employee share ownership plans are no longer reserved just for large, publicly listed companies. As Rebecca Spicer discovers, they can be a useful tool for any business wanting to attract, retain and motivate staff.
It’s no secret that the skills shortage is crippling many industries. And so, tools and strategies that attract and keep key staff are more crucial than ever. Employee share ownership plans (ESOPs), or employee share schemes, are one such tool. These are arrangements whereby business owners share the surplus value (profitability and capital value) of their enterprise with employees.
Businesses of all sizes and types can develop ESOPs, which generally aim to encourage employees to invest in the business they work in, and to more closely align employee performance with company financial and business objectives.
“The whole purpose behind employee share ownership schemes is that the employees have a share in the business, and it’s considered that will give them a greater incentive to perform. And as the business grows, they benefit,” explains Gary Addison, senior tax consultant at CPA Australia.
Consequently, these plans offer potential benefits to employers such as helping to retain key employees, motivating staff, and improving productivity, efficiency, and competitiveness.
Given these potentially positive outcomes, the Federal Government and groups such as the Australian Employee Ownership Association (AEOA) aim to increase the amount of ESOPs offered to Australian employees, and the focus has been towards educating and assisting unlisted organisations (mainly SMEs) to understand the process and benefits.
In 2004, Kevin Andrews, Minister for Workplace Relations, announced the Government’s target to double employee share ownership in Australia by 2009. His department has since launched initiatives such as the Employee Share Plans: Getting Started kit, and guides for employers and employees about employee share ownership on the workplace.gov.au website, and has a dedicated ESO Development Unit, which individuals can call for more information regarding these plans.
It’s important to understand immediately that offering ESOPs in your staff remuneration packages won’t always mean offering them actual ‘shares’ in the company. In fact, many SMEs are unlisted and won’t have physical shares to offer, but as Gary Fitton, president of AEOA, reiterates, “It’s about sharing in the surplus value of the organisation”, and that can be through alternative arrangements that still provide staff with equity in your business.
The type of plan used and how it’s applied in a business will greatly depend on each individual business’ aims and needs. “It’s all part of their attraction, retention, and motivational strategy for staff, but it’s all linked back to their remuneration strategies,” explains Fitton. “And when you look at remuneration, the optimum remuneration strategy has three elements: fixed remuneration (what you’re paid to come to work), short-term variables (your profit share, incentives, and bonuses), and long-term incentives (usually a share in the capital value of the organisation-an ESOP).”
Fitton says the first step business owners should take when considering ESOPs is to determine the purpose of the plan. Ask yourself: ‘Why am I doing this?’. “Some employers might believe their employees have a fundamental right to have shares in their company. But most employers do it because it’s pragmatic, it needs to be done or they think it’s important for the performance of the company,” says Fitton. “If you’re trying to attract highly trained and skilled people, you can’t attract them unless you can offer them equity. So there’s a need to do it, and it’s linked to how you run your business.”
Got something to say? Join the small business forum here at DynamicBusiness.com.au.
