Not all Employee Share Schemes are created equal – Why the PPT really works.

Which Employee Share Ownership Plan is right for your business? Watch our Free Webinar 

Not all Employee Share Schemes are created equal – Why the PPT really works.

Blog

Not all Employee Share Schemes are created equal – Why the PPT really works.

By , April 7, 2021
ESOP Thumbnail

An Employee Share Ownership Plan is essentially a trust deed, a set of plan rules, maybe an employee manual and an invitation or offer letter to employees – all legally important to set up the plan and make sure it complies with all the Corporations Act and taxation rules and regulations – BUT NONE OF THESE ACTUALLY MAKE THE ESOP WORK.

No client has ever asked for an ESOP because they need the legal documents – What clients actually want is to retain good employees, to provide succession options, to reward long serving team members, to increase engagement, to attract new staff, to provide a better longer-term reward or to gradually sell the business to employees as part of a longer term legacy exit.

In order to actually deliver these outcomes, the plan needs a couple of key items that are nothing to do with the legal documents:

Employee education – the academic research is quite clear ESOP’s deliver better outcomes all-round of employees are informed and engaged in the process and in knowing how they can help build value in the business they now own part of. All of our ESOP’s include employee workshops.

Business outcomes focus – improving profit or productivity or reducing sick leave are all business outcomes that our clients report as a result of the ESOP – but it is not “caused” by the ESOP – it is a result of correctly designing the ESOP rules to make sure they are focused on this particular KPI you are trying to influence – in other words improvement in that KPI increases the contributions made to the ESOP.

Employment parameters – as part of the implementation a full review of employment criteria is needed. Do all employees have job descriptions? Do they all contain relevant KPIs? Are they part of an annual performance review process? Does that process and review influence their remuneration structure – salary, STI and LTI components (including the ESOP)?

Disqualifying discount – an ESOP is a form of LTI – long term being the key – the key trade-off for being able to own equity in the company your work for is time – time working at the company. If the employee leaves early our disqualifying discount kicks in and reduces the amount the employee is paid out – a penalty for “early” leavers.

Ownership Mindset – this management system works perfectly well with an ESOP – but it is also used successfully in businesses that are not employee owned, when combined they work together to help employees to think and act like business owners.

Tax Concessions – our ESOP has taxation rulings that confirm the deductibility of contributions by the employer and the deferral of tax by the employee – creating quite a tax effective remuneration model.

Ladder to Equity – the gradual transition from employee income (salary, hourly rate) to profit share (bonus scheme) to equity ownership (ESOP) should be carefully managed to ensure real business outcomes are met at each milestone.

WIN-WIN-WIN-WIN – if designed properly then all parties should win. That is employees are better off (research clearly shows a wealth benefit for employees in an ESOP), the business is better off (reduced owner reliance and structured remuneration based on KPI’s, improve business valuation), the owners/founder is better off (a pre-determined, documented succession plan and focused & motivated employees reduce responsibility and workload), external parties like suppliers and customers are also better off with consumers keen to buy from and happier to pay more to employee owned companies.

Click here to get in touch with one of our accredited advisers today. 

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.

Interested in retaining your key employees?
Get your free ESOP whitepaper.