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How do employees benefit from an Employee Share Ownership Plan (ESOP)

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How do employees benefit from an Employee Share Ownership Plan (ESOP)

By , October 12, 2021
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According to the ownership culture survey by Loren Rodgers in the United States which took a survey-based approach to measuring the psychology of ownership, understanding how employees benefit from an employee share plan is crucial to success. From an employee’s point of view, even the words ownership might have many different meanings. We would expect many to be positive, but some employees could be suspicious and see employee ownership plan as a means of switching hard earned gains from a cash payment into a bogus share scheme.

Based on Rodgers’ work with USA employee-owned companies over more than 15 years, he identified five major meanings of ownership for most employees. Those were:

  • Financial payoff – ownership as a financial benefit; as owners, most people expected at some point to receive cash value for their equity.
  • Participation – owners being included in the decisions that affect their day-to-day work; wanting to have a say over the issues that affect their working conditions.
  • Influence – having part in a broader companywide decision-making role. Owners want a degree of influence over strategic business issues.
  • Community – a bond with their fellow owners; they want to feel the whole company is “in this together”.
  • Fairness – being treated fairly by the company; owners want sensible rules and they do not want “special treatment” for specific individuals. (Rodgers 2001).

The researchers conclude “the introduction of a broad ESOP without combining an employee participation program is unlikely to achieve the outstanding success and benefit sought.” (McElvaney and Wardell)

Employees benefit from employee share ownership plans in a number of ways – some of the main benefits include:

  • a feeling of ownership of the company
  • a degree of participation in the company in a voice in the business as a shareholder.
  • greater job satisfaction through receiving tangibly rewards for them performance.
  • a tax efficient way of acquiring shares in the opportunity to earn a substantial capital sale.
  • increased flexibility and choice when negotiating workplace arrangements.
  • a sense of commitment and a stronger relationship with their workplace.

The researchers conclude:

Combining employee ownership with employee participation could address the issue of balancing short-term and long-term business decisions, employees would be very interested in short-term goals, but more so, in working towards their long-term security. ESOPs could also be an excellent way to achieve and maintain loyalty of non-family member employees. Thus, ESOPs may be able to align the interests of the employee with the employer and increase the perception by employees that their financial interests coincide with that of their employer. When employees gain a financial interest in the company they work for this motivates employees to “think like owners” leading to a conscious choice to actively enhance performance.

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.

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