Employee Share Ownership Plan (ESOP)

We have seen an unprecedented rise ( over 400 % vs pre-COVID ) in enquiry and sales of ESOP’s and according to several law firms this is quite common as employers struggle with a combination of:

  • Working from home ( hopefully !) 
  • Baby boomer retirements ( approx. 5,500 people per week are turning 65 in Australia
  • Lack of skilled immigration ( often professional services were “bolstered” by professional backpackers who worked during the day and partied in Australia at night and on weekends.

All of this leads to a very tight labour market – the “great resignation” – is also increasing pressure on employers to retain staff.

The most common reason to implement a share plan used to be as a succession tool ( gradually sell my business down to employees and reduce my involvement ) – now it’s all about attracting and retaining key people without constant pay rises and cash drain.

As Australia pushes towards an innovation agenda – including the proposed solution for climate change – technology led investment – a talented workforce is a vital component – the ESS start-up rules introduced in 2015 by the Turnbull government certainly increased interest – we have implemented 10 schemes for start-ups this year, based on the “new” rules. The significant change is in older , mature, professional services firms - architects, engineers, financial advisers – mid-market companies turning over between $2mil and $100mil but still privately owned ( often by a small number of shareholders ) who are all people dependent businesses, in a tight labour market looking for new ways to attract, retain and motivate key people.

81 percent of respondents to Glassdoor's Employee Appreciation Survey said they're motivated to work harder when their boss shows appreciation for their work. In contrast, only 38 percent said they work harder when their boss is demanding. Just 37 percent said they work harder because they fear losing their job.

The ultimate appreciation is to invite the employee into ownership in the business they work for.

Employee-owned schemes can, therefore, can help to foster a workplace where individuals feel valued and will strive to work harder for the business. At the same time aligning the financial interest of the owner with the employees so everyone benefits when the business performs well.

After all, if an employee has a vested interest in helping the company succeed, they’ll be committed to trying their hardest and more reluctant to go elsewhere.

 According to the Employee Ownership Association’s Impact Report  ( UK ) the “impact of increasing employee ownership in the UK will lead to greater economic stability and an economic model” and bring about “more dynamic communities, higher levels of employment, and unprecedented levels of innovation, positioning the UK centre stage in a global competitive market.”

We now have over 100 businesses with one of our Employee Share Ownership Plans and those plans include over 1,000 employees who own millions of dollars of equity in what were previously tightly held privately owned companies. The other substantial benefit relates to the owners being able to see and implement a legacy stewardship focused exit strategy – looking after the employees is often a key outcome.

Quick start guide – 10 steps to employee ownership

  1.  Clearly list your key business outcomes – what do you want to plan to achieve – attract new staff, retain existing key people, motivate you team to better performance, fund retirement of founders, internal succession, management buy-out etc.
  2. Understand your business valuation – what is the business worth and what are the key drivers – more importantly how could you accelerate this value.
  3. Financial modelling – understand the various levers used in designing the ESOP to achieve the outcomes and check the model “works” in terms of % equity, number of employees, profit share etc.
  4. Determine which plan meets your needs, do you qualify for a startup plan for example.
  5. Document the plan and key rules covering, eligibility, entry, funding, exit, sell down, dividends etc.
  6. Educate the key employees – make sure everyone understands the plan and WIIFM.
  7. Update the valuation annually – this is a taxation requirement, but more importantly it shows employees how the plan is progressing.
  8. Provide information to employees – not just valuation but also basic company KPI’s to help them deliver results.
  9. Market the employee ownership aspect – it is very popular for both recruitment but also customers.
  10. Review and update the plan – make sure it still delivers on goals and outcomes.

Craig West
CEO & Founder

Website: www.succession.plus    More aobut the author: https://succession.plus/craigwest/  

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