In this article we’ll cover:
- The growing shift towards employee ownership for Australian businesses in 2024
- Different types of employee ownership
- Pros and cons of common employee ownership trust and share models.
Employee ownership continues to gain traction in the Australian business sector, with hundreds of Employee Share Ownership Plans (ESOP) and Employee Share Schemes (ESS) launched in the last decade.
The transition is about more than rewarding employees’ contributions to business success; it’s part of a wider cultural shift that values growing the ‘ownership mindset’.
The employee ownership model is a departure from the traditional top-down management structure, where ownership, decision-making and profits are concentrated in the hands of a few, towards a more inclusive model where employees feel they have a stake in the organisation’s success.
Creating a share scheme can form part of an exit strategy for business owners — such as when one partner is looking to exit the business.
An ESOP (or similar) can allow for a buyout or a graceful transition away from an active leadership role, empowering key people in the business to take the helm.
Whether your retirement is on the horizon or decades away, we’re able to help with our Five-Stage Strategy for Business Succession.
As the owner of a privately owned mid-market business, you have the unique potential to create a fair business model that attracts the best talent, benefits the community, and increases employee engagement.
Defining ’employee ownership’
What does it mean to be an employee shareholder?
At its core, employee ownership refers to offering employees a financial interest in the company. Many private (unlisted) companies think offering company shares is not possible for them. However, no IPO or stock ticker is needed.
Stock options and profit-sharing plans direct ownership through stock grants or trusts. The underlying principle is to align the interests of employees with those of the business owner by making them co-owners and stakeholders in the organisation’s success.
Transformative benefits of employee ownership
Employee ownership the financial gains and use as a mechanism for retirement, this model reshapes workplace dynamics, creating a workplace where success is a shared venture. Key benefits include:
- Increased Employee Engagement: Employee ownership fosters a sense of ownership, leading to higher engagement, motivation, and commitment among employees. They are more likely to go the extra mile to ensure the company’s success.
- Improved Company Performance: Research shows that employee-owned companies outperform non-employee-owned counterparts. This can be attributed to a shared sense of responsibility and a long-term perspective.
- Attracting and Retaining Talent: Employee ownership can be a powerful recruitment and retention tool. It attracts top talent looking for a stake in the companies they work for and encourages current employees to stay.
- Tax Benefits: Some forms of employee ownership, like ESOPs, offer tax advantages for both the company and employees, making it a financially attractive option.
We also often talk to clients about the ‘ownership mindset’ as a significant upside of share plans. Managing workplace culture is an ongoing process, but an ESOP/ESS provides a real-world framework to help employees make better daily decisions for the company’s long-term health.
An Employee Share Ownership Plan helps build autonomy into your business, with employees empowered to make decisions, holding a greater responsibility over their own livelihood — and are more likely to help keep others in line to protect that.
What do employees think of Employee Share Plans?
Many employers believe that their staff would be uninterested in becoming part owners through a share plan.
The truth is that small-to-medium businesses in Australia simply misunderstand and under-utilise share plans. A 2017 study looked at the sentiment of employees in Australian ESOPs, finding:
- 52% of plan participants said the plan reduced the chance they would leave the company either “to a great extent” or “to some extent”.
- 63% of participants felt “very loyal” to the company.
- 73% of plan participants agreed or strongly agreed that the company was an excellent place to work.
Potential drawbacks of employee ownership
Employee share ownership has many advantages but may have some drawbacks if such plans are poorly executed.
An ESOP is perhaps best thought of as a way to build long-term wealth, link personal performance with business performance through financial rewards, and encourage staff to take on an ‘ownership mindset’ in daily work.
- Complex Implementation: Establishing and managing employee ownership plans can be complex and costly. It requires legal, financial, and administrative expertise.
- Lack of Liquidity: Some forms of employee ownership offer employees only limited access to the value of their shares until retirement or an exit event, which can be a drawback for those needing immediate liquidity.
- Dilution of Ownership: Granting shares or options to employees can dilute existing shareholders’ ownership stake, including founders and early investors.
- Communication Challenges: Ensuring all employees understand the implications and benefits of employee ownership can be challenging.
Will an ESOP help or hinder selling a business on the open market?
Experienced business investors will be familiar with “vital person risk”. The departure of key individuals — owners and senior employees — post-sale poses significant challenges for a business as the new owner becomes familiar with current operations, customers, and suppliers.
An Employee Share Ownership Plan (ESOP) helps retain key personnel and establishes a foundation for sustained business growth and innovation.
Having an established model that incentivises current employees to continue their involvement (being well-acquainted with business intricacies and holding tacit knowledge) provides a level of assurance to prospective buyers.
Why is a trust fund useful in an employee share ownership plan?
A common way to manage the shares in an employee ownership scheme is via an Employee Ownership Trust, like our Peak Performance Trust (PPT).
The Peak Performance Trust is an employee share trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA) and subsection 130-85(4) and is a special unit trust whose operation is governed by a trust deed.
The trust deed will detail the terms and conditions of the trust, covering:
- the powers and responsibilities of the trustee
- rights of beneficiaries (employees)
- share allocation mechanisms, and
- any conditions for the distribution of shares.
It will state the percentage of ownership to be allocated to employees, criteria for participation, and any performance-based conditions.
An appointed trustee can be an individual or a corporate entity, often chosen for their impartiality and ability to ensure compliance with relevant laws and regulations such as the Corporations Act 2001 and ASIC requirements.
While we’ve seen rapid development of AI-powered legal tools in drafting trust deeds, such generic documentation may well include elements unsuitable for your specific goals.
Conversely, engaging an experienced Succession Plus Partner can assist business owners in developing the right plan for the business, as well as educate employees to enhance participation.
Enlisting support from an experienced ESOP advisor provides business owners with a single point of contact to compile relevant advice from legal, financial, and tax professionals — ensuring compliance and effectiveness of the trust.
Three main types of employee ownership plans
Employee Stock Ownership Plans (ESOPs)
ESOPs are probably the most well-known form of employee ownership. Explained simply, a trust is established to hold shares restricted stock on behalf of employees. Over time, employees become beneficial owners of shares, which they can cash out as part of their retirement plan.
Pros
- Encourages long-term employee commitment.
- Can provide a retirement benefit for employees.
- Aligns employees’ interests with the company’s performance.
Cons
- Complex to administer.
- Requires substantial financial investment by the company.
- Limited liquidity for employees until retirement or exit.
Employee Share Option Plans (ESOPs)
ESOPs grant employees the employer the option to purchase company shares at a predetermined share price at a future date. This incentivises employees by allowing them to share in the company’s potential growth.
Employees may receive either ‘share options’ (rights to purchase shares at a predetermined price), ‘restricted shares’ (shares with certain conditions attached), or ‘performance rights’ (rights to shares subject to meeting performance criteria).
Pros
- Motivates employees through the prospect of future gains.
- Can be a valuable recruitment and retention tool.
- Employees only exercise options if the company performs well.
Cons
- May not provide immediate financial benefits to employees.
- Dilution of ownership if options are exercised.
- Requires careful communication and education.
Employee Share Purchase Plans (ESPPs)
ESPPs enable employees to buy company shares at a discounted price, often through payroll deductions (sometimes called ‘salary sacrifice’ up to $5000 per annum). This encourages broad-based employee ownership of company stock.
Pros
- Inclusive and accessible to all employees.
- Creates a sense of ownership and involvement.
- Typically results in immediate financial gains for employees.
Cons
- Limited maximum purchase amounts.
- Potential administrative complexity.
- May not align interests as strongly as other forms of ownership.
Ask us anything about your proposed ESOP plan
Employee ownership has the potential to unlock higher performance, engagement, and loyalty among key employees — while offering attractive benefits to both companies and their workforce.
However, the transformation usually involves complexities and challenges that even the most diligent MBA-wielding leaders are ill-prepared for.
Thorough evaluation and consideration of the specific goals and circumstances are essential to determine if employee ownership is the right path for a business.
A simplified ESS plan might be a good place to start; having a Succession Plus Partner to help create and manage the plan gives owners and stakeholders the confidence that it’s a right fit for the long-term goals of all involved.
We set up the first Peak Performance Trust in 2006 as part of an ESOP for an LJ Hooker branch — which is still operating today.
With 135 successful share plans in place, unlocking over $60 million in collective equity value, there is perhaps no more experienced player in Australia.
Set up a free 30-minute consultation with an advisor to see how your employee ownership transition can be a powerful driver of success, creating a more equitable and prosperous future for all stakeholders.
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