Employee Share Ownership Plans (ESOPs) for Australia, announcement by Minister for Industrial Relations
Employee Share Ownership Plans (ESOPs) lead to increased productivity, improved engagement, better retention of staff and higher financial performance.
Employee Share Ownership Plans (ESOPs) are a potential solution to productivity and wages growth, according to an announcement last week by Christian Porter, Attorney General and Minister for Industrial Relations. The released discussion document also states that research suggests that organisations with higher employee engagement are also doing well in terms of labour productivity and financial performance.
The academic research strongly supports all of these improvements and more. Our research, as part of my doctoral studies in ESOPs in Australia, clearly shows substantial improvements when properly implemented and coupled with improved engagement and involvement of key employees.
The succession issue is also relevant to the government’s focus – 5,000 baby boomers are turning 65 per week in Australia – those that own businesses are struggling to exit – tight finance, slow economy and oversupply all dampen the market. There are two primary themes for successful exit planning – financial harvest or stewardship.
Financial harvest refers to the ability of the owners to “harvest” the equity value in the business and successfully extract that value upon exit, such as by sale to an independent external buyer (including private equity strategic buyers or IPO). On the other hand, stewardship does not involve any harvesting of value, but instead focuses on an ongoing role for the owners to have influence over the future and long-term viability of the firm, often via family succession or employee buyout.
According to the available literature, for the majority of owners who fail to consider their exit strategy until they decide to actually exit, the strategic phase is likely to be rushed. As a result, these owners limit their potential or available exit options, and also lessen the opportunity to maximise wealth and legacy; at worst, some owners will fail to move through the exit phase altogether.
A recent survey of family businesses noted that 72% of respondents measured success in more than just economic terms. Research also defines a stewardship-based exit strategy in which an exiting owner recognises an “ongoing sense of obligation or duty to others” and noted that owners under the stewardship-based exit strategy are willing to sacrifice financial gains for the welfare of other stakeholders.
Enter the ESOP model – a unique combination of stewardship (legacy) and harvest – a win-win-win. The business continues on successfully, the owners get to extract value and retire and the employees get to own equity in the business they work for, enjoying higher reward, including capital gains. In the UK approx. 30% of all business exits use the management buy-out model, in Australia, this is currently less than 5%.
Check out our recently published book, Build It, which outlines the practical application, the tax and technical issues and the underlying research, showing business owners how new thinking on employee share ownership plans can not only increase staff engagement and performance but safeguard the future succession of your business.