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Employee share schemes — or ESSs — are a legal arrangement set up by businesses to allow their employees to own equity in the business. They are also known as employee share ownership plans, employee equity plans, employee options plans and phantom share plans.
They are suitable for small businesses through to the big end of town. In fact, many privately-owned businesses are surprised to learn they don’t have to be listed on the Australian Securities Exchange to offer shares to their employees. There are different types of employee share scheme plans to consider depending on the size and structure of the business and what the owner hopes to achieve from offering one.
Why use an employee share scheme?
Simply, businesses offer ESSs to encourage their employees to think and act like owners. By offering an employee a stake in the business’ success, they can serve to align the employee’s personal financial goals with that of the business.
Unlike bonus schemes, incentives and commissions, which have a place in business but are short-term solutions, ESSs aim to maximise the value of the business over the longer term by creating a team that is single-minded about working towards and sharing the benefits of a successful and profitable business.
ESSs are used for several reasons:
1. To offer employees a competitive remuneration package
Often, a remuneration package that combines a salary with long-term equity in the business is more attractive than a big up-front salary alone, and this can be an effective way for smaller businesses to compete with the salaries offered by corporate Australia. Most ESSs have a long-term focus of three to seven years, allowing employees to accumulate savings through acquiring and holding shares. The employee can then benefit from both capital gain in the value of the shares and income through the payment of dividends.
However, it’s important to explore what your employees or job candidates actually want. You may discover that for many, income is not the predominant driving factor. Most of us are looking for a flexible and enjoyable work environment, professional development and a pathway to career progression, as well as being appropriately remunerated for our work. Start with your employees and develop a solution to remuneration and other benefits that will make them feel valued, motivated to contribute to the business’ success and encouraged to stick around long-term.
2. To encourage greater participation and engagement within the team
As owners in the business, ESS participants have greater involvement in the decision-making process, which can make them feel more engaged with the work and its outcomes.
Rutgers University research shows that to get the full benefits of employee ownership, it must be coupled with high-participation and performance policies, which include information sharing, teamwork and autonomy. Performance increases ranging from 7-23% have been recorded at companies that get this mix right.
3. To encourage staff to stay in the business long-term
ESSs can be structured to match and deliver business goals and outcomes, the most common being employee retention. By implementing rules within your ESS — such as clauses if the employee leaves the business early, or ongoing contributions if the employee stays in the business — more employees can be motivated to stay.
4. For succession planning
An ESS can be an effective employee buy-out instrument when founders want to exit the business. By providing a combination of financial harvest or selling the equity to remaining staff at a reasonable price, and stewardship, or enabling trusted key people to continue the culture, style and character of the company and making sure clients, suppliers and employees are treated well in the transition, founders can benefit from a more gradual, controlled and documented exit.
5. For funding retirement
ESSs can give founders the ability to extract cash prior to retirement by selling shares to employees. The employees benefit from the tax concessions associated with ESS plans, and the founders avoid the market challenges and unpredictability of selling the business to an external buyer.
Read the full story: SmartCompany Plus
Download the PDF here.
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