Is an Employee Share Ownership Plan (ESOP) an effective remuneration strategy?
Using an Employee Share Ownership Plan (ESOP) as part of a remuneration or incentive plan for employees is becoming far more popular. Especially in a tight labour market where good employees are hard to find and even harder to keep. Employers are looking for more innovative ways to structure remuneration packages.
Using an equity-based incentive like an ESOP is an ideal way to do this for a number of reasons.
- Firstly, an ESOP should be self-funded (with contributions being made out of the improved performance) – similar to a profit share plan.
- Secondly, and most importantly, an ESOP involves equity (ownership of shares in the company) which for the first time exposes employees to capital gains (increases in the value of the shares over time) which they are normally not able to access. In this way, the remuneration structure is providing far better alignment between the founders/shareholders goals and the employees than is normally the case with traditional wages and bonus systems.
During the design and implementation phase, we always review existing employment and remuneration structures to make sure they are in place and working correctly. Employment agreements with clear role descriptions and KPI’s, performance review and management systems and of course the existing incentive and bonus plans in place, are all reviewed. This means we can custom design the plan to match agreed business outcomes and goals. This should not only be improved profit but other key business targets to ensure the plan is benefiting not only the employees but also the company and the existing shareholders.