Is an ESOP an effective remuneration strategy? | Succession Plus

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Is an Employee Share Ownership Plan (ESOP) an effective remuneration strategy?

FAQ

Is an Employee Share Ownership Plan (ESOP) an effective remuneration strategy?

By , September 10, 2019
Remuneration_small

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.

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.