Employee Share Ownership
All ESOP offers must also be assessed (valued) at the time of offer to determine impact on profit and loss. To ensure compliance with corporate governance principles, it’s advised that businesses use a person other than their accountant or auditor to conduct this valuation. A qualified valuer, accountant, or specialised ESOP consultant can help here.
At OBS, Cook says they had someone internally look at what would be involved in implementing ESOPs, but realised early that they’d need outside help. They sought out a professional ESOP consultant who took them through all their options, guided them through the rules, including all accounting and legal requirements, and who has since designed and implemented ESOPs for OBS’s staff. The consulting firm now also administers the plans on behalf of OBS on an ongoing basis.
When choosing a consultant, Cook’s advice is to go with one who’s got plenty of experience. A list of consultants can be found on the AEOA website (www.aeoa.org.au).
The main goal for business owners implementing ESOPs will be to get a 100 percent participation rate among those staff offered plans, so the benefits of aligning the interests of management and employees are achieved.
Consequently it’s important that participants are taken into account at the planning and design stage, that the offer material is clearly understood, and that there is a comprehensive communication strategy in place. “You’ve got to make sure there’s no burden or obstacle to employees taking up shares,” explains Fitton. “And you only achieve 100 percent participation when employees are confident that their shares and the valuation of the company are realistic and correct. They’ve got to be confident that at the end of the day they can convert their shares into realisable cash.”
In the case of OBS all staff have an ESOP in their remuneration package. “I believe the team think it’s a good thing,” says Cook. “It’s obviously a challenge with share options that people understand exactly what they are and how they work and so forth, so we have a number of internal videos and training on induction so people can understand what it is and how it works, and then we keep reiterating that.”
The time it takes to establish an ESOP will vary depending on whether more than one plan is to be adopted, whether shareholder approval is required, and the degree and complexity of the design and implementation of the plan.
A standard executive option plan could be designed, documented, and implemented in a matter of weeks, whereas a complex ESOP rollout, with multiple plans and offers, may take several months. Fitton says the most time consuming part usually is the company’s own decision-making process, and that was certainly the case for OBS. Cook says it took around six months to roll out their plans to staff, and most of that time was taken up in deciding which type of plans would suit best, then how the share options would be divided, and considering all the different scenarios that might happen and how they’d handle them.
While he admits they could have completed it a lot sooner, there was no hurry. They started exploring the idea in December one year, and only needed it up and running by the time performance reviews came around in the middle of the following year.
While employee share plans might seem complex or costly to implement, the key message to SMEs is that ESOPs can be put in place for all types of organisations and all types of employees and/or contract non-employees working in Australia. And given the current skills crisis facing many industries, ESOPs could be your answer to acquiring and retaining key employees.
More Info
Department of Employment & Workplace Relations: http://www.workplace.gov.au/eso
ESO Development Unit: 1800 181 088
Australian Employee Ownership Association: http://www.aeoa.org.au
Australian Tax Office: http://www.ato.gov.au