First of all, you need to know what an ESOP is. An ESOP, or Employee Share Ownership Plan, is an alternative employee benefit. It gives employees the option to buy company shares after reaching a time or performance-based target, without having to invest their own money.
ESOPs are generally associated with startups, and for a simple reason. A startup does not have the resources to compete with established companies for recruits. But an ESOP lets startups leverage their future potential to serve their present needs.
Here are five more things you need to know if you’re considering an ESOP.
Benefits for the employee
An ESOP creates higher pay and more savings for employees. When an employee’s benefits have a direct connection with the company’s success, this translates to better employee performance and motivation. Suddenly, with equal motivation, every employee thinks and plans like business owners and management. Not only that, but according to the 2010 General Social Survey, companies with employee ownership perform better in times of economic downturn, so there is greater job security for employees.
Benefits for the employer
Small to mid-range companies have fewer resources to offer employee benefit packages, especially compared to larger companies. ESOPs level the talent recruitment playing field. And once they join, employees have more motivation to work harder, which results in lower absenteeism and turnover rates.
When employees see a real relationship between their hard work, the growth of the company, and their personal finances, it can transform a workforce.
The contributions of plan participants also generate a steady cash income for the company, while reducing corporate tax. Both the principal and interest payments made to a bank or selling shareholder provide a deduction to corporate tax. When it comes to employees, ESOPs are often a much more tax efficient way for employees to earn money - income tax is taxed at a higher rate than income in the form of shares.
There are plenty of details
This can be an intimidating project to take on, for a company of any size – but particularly for small to mid-sized businesses. You are going to need a wide range of accounting procedures, as well as considering the logistics – for example, how will you handle the new voting rights that your employees will have at your AGM? If you don’t have a dedicated finance department and a robust communication scheme, now is the time to get those in order.
(Or, find an equity compensation management company to handle the whole process, and all the details, for you.)
And there are plenty of choices
There are a wide range of ESOPs, for a wide range of industries and countries. There are direct-purchase programmes, stock options, restricted stock, phantom options, just to name a few. Depending on your jurisdiction, and your specific company needs, you can choose which one best serves you and your employees.
Even among similar programmes specific plan rules can vary widely. It’s important that you choose rules that best serve your company and your employees.
And there you go. Just about everything you need to know if you’re considering an ESOP.
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If you think the benefits sound great, but you’re still unsure about setting up the plan yourself, contact Global Shares and we’ll put our award-winning equity compensation experience to work for you.