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Employee Retention Through The Power of Employee Ownership Plans

Employee Ownership

Employee Retention Through The Power of Employee Ownership Plans

By , March 20, 2024
Employee retention

In this article we’ll cover:

  • How Employee Share Ownership Plans (ESOPs) are revolutionising talent retention by aligning financial interests and fostering commitment among team members.
  • Why traditional employee retention strategies might not be enough.
  • Real-world examples of the impact of ESOPs on financial growth for the business and security for employees.

Attracting and retaining top talent is a constant challenge for all businesses. Any business worth its salt will have some kind of employee engagement and retention strategy, but is yours delivering what employees actually want? An employee share ownership plan may be right for your organisation to deliver a raft of benefits to the business and key staff.

HR firm Flare released the National Employee Benefits Index last year, pointing to the fact that financial stress looms large in employees’ minds: 52% of Aussies face financial pressure thanks to rising interest rates and the cost of living. So, while an ESOP is not a ‘pay rise’, it can be a financial incentive.

According to a national LinkedIn survey, 59% of all working adults planned to switch jobs last year, with two-thirds saying they feel overworked and undervalued, making them feel not personally committed to their current jobs.

Employee retention strategies: what works?

The sense that ‘no one wants to work anymore‘ is neither new nor accurate, but according to Forbes, leaders cite a ‘lack of response to job postings’ and ‘poor quality candidates’ when describing why employers say it’s hard to hire right now. Others argue that employers are out of touch with what top talent expects from a role.

Salary packaging, pizza Fridays, and free gym memberships might not be enough anymore.

So, in a broadly competitive job market — and with many industries such as construction, health and hospitality suffering genuine skills shortages — what can your business offer to become an employer of choice and support employee retention?

Competitive Compensation: Ensure that benefits are competitive in the industry to attract and retain top talent.

Employee Development: Opportunities to help employees enhance their skills and advance in their careers. Develop clear career paths for employees, helping them see potential advancement within the organisation.

Recognition and Rewards: Acknowledge and reward employees for their achievements to boost morale, employee satisfaction, and job satisfaction.

Open Communication: Foster transparent communication channels to address concerns, encourage employees to provide feedback, and inform employees about company goals.

Employee Involvement: Involve employees in decision-making processes, making them feel valued and invested in the success of the company.

All employee retention strategies must acknowledge that workers want to be financially rewarded for the value they bring to the organisation and boost the job satisfaction of working in a cohesive, supportive culture.

How does ESOP work for employee retention?

The way to deliver all of the above while becoming more profitable in the process is through Employee Share Ownership Plans (ESOPs).

ESOPs are now being implemented in Australian companies of all sizes as an employee retention strategy, offering financial benefits and fostering greater commitment among team members.

Having implemented 136 employee ownership schemes for Australian businesses since 2006, we’re keen to share how harnessing the power of ESOPs can be a game-changer for talent retention, using real-world examples to illustrate their impact on employees.

Understanding ESOP as part of your employee retention strategy

A quick recap of what an ESOP entails. An Employee Share Ownership Plan (ESOP) can boost employment retention by aligning employees’ financial interests with the company’s success.

It provides a stake in the business through stock ownership, contributing to competitive compensation. Reinforcing the ‘ownership mindset’ encourages open communication and collaborative decision-making. And, as the company prospers, employees benefit financially, reinforcing their commitment to the organisation and enhancing overall retention.

Ownership can take various forms, such as stock options, direct stock grants, or shares held in trust.

ESOP improves employee retention as employees also become shareholders, aligning their interests with the company’s success. There is no need to undergo an IPO or be an ASX-listed company to create these shares.

Read more about the various types of ownership plan structures here.

Example 1: Financial Growth and Stability

Imagine Jane, a talented software developer, working for a tech startup that offers an ESOP program. Over the years, Jane’s contributions have been instrumental in the company’s growth. As part of her compensation package, she receives stock options, allowing her to purchase company shares at a predetermined price.

Fast forward a few years, and the startup has become a thriving tech giant. The stock price has skyrocketed, and Jane’s stock options are now worth a substantial amount. This financial windfall is a tangible reward for her hard work and gives her a strong incentive to stay with the company.

Jane knows that her financial future is tied to the company’s success, motivating her to continue contributing her expertise and creativity.

Example 2: Building a Culture of Ownership

Consider Tom, a marketing manager at a medium-sized advertising agency that has implemented an ESOP. The agency’s ESOP grants employees direct ownership shares, making them co-owners of the business.

Tom has always been passionate about his work, but now, as a co-owner, he feels an even deeper connection to the company’s mission and success. He actively participates in decision-making processes, offers valuable insights, and takes pride in the agency’s achievements.

The ESOP has transformed the workplace culture, fostering a sense of collective ownership and collaboration among employees.

Tom’s commitment to the agency is not just about a job; it’s about building a legacy and ensuring its long-term prosperity, ultimately leading to his job satisfaction and loyalty.

Example 3: Retirement Security

Now, let’s meet Alex, a seasoned engineer in a manufacturing company that has adopted an ESOP. As Alex approaches retirement age, he knows that his ESOP shares have grown significantly in value over the years. When he retires, he can cash out these shares, providing him with a substantial nest egg for his retirement years.

This financial security is a powerful retention tool. Employees like Alex are likelier to stay with a company that values their contributions during their working years and provides a meaningful retirement benefit.

Knowing that his financial future is secure, Alex has no reason to seek opportunities elsewhere.

How to enhance employee job satisfaction through an ESOP

Employee Share Ownership Plans (ESOPs) are a unique avenue to boost not only financial rewards but also overall job satisfaction for a few reasons:

1. Empowering employees with a sense of purpose

ESOPs contribute to a profound sense of purpose among employees. When workers know they are not just fulfilling a job role but actively contributing to the company’s success and their own financial well-being, job satisfaction naturally increases. The ownership mindset fostered by ESOPs aligns personal goals with organisational success, creating a shared journey towards prosperity.

2. Fostering a collaborative and supportive culture

A positive workplace culture is a cornerstone of job satisfaction. ESOPs encourage open communication and collaborative decision-making. Employees, feeling like valued stakeholders, become more engaged in discussions, share ideas, and actively participate in shaping the company’s future. A collaborative atmosphere contributes to a supportive culture that resonates with employees’ desires for a positive work environment.

3. Recognition beyond traditional rewards

While competitive compensation and traditional benefits remain essential, employees also seek recognition for their contributions. ESOPs provide a unique form of acknowledgment by making employees co-owners of the business. This recognition goes beyond mere words, demonstrating a tangible investment in the employee’s role and future. Such acknowledgment significantly enhances job satisfaction, making employees feel truly valued.

4. Long-term commitment and loyalty

Job satisfaction often correlates with a sense of long-term commitment to a company. Through ESOPs, employees see not just a job but a long-lasting partnership. The financial benefits tied to the company’s success incentivise employees to remain committed and loyal. This sense of loyalty contributes to a stable workforce, reducing employee turnover rates and creating a positive cycle of sustained job satisfaction.

Frequently asked questions about using ESOP employee retention strategies

Are ESOPs suitable for businesses of all sizes?

Our ESOPs are most often implemented in private companies; however, there is a misconception that only public (listed) companies can offer them. We’ve created employee ownership programs for workplaces with 10 FTE staff, to over 500 employees in all states.

Do ESOPs require compliance with specific legal and tax regulations?

Laws enacted in 2015 mean Australian Employee Share Ownership Plans (ESOPs) do require compliance with specific legal and tax regulations.

The amendments introduced clearer guidelines for ESOPs, outlining the necessary legal framework and tax implications. To establish and maintain ESOPs, businesses must adhere to these regulations to ensure the plans align with the updated legal landscape. Ensuring compliance not only safeguards the interests of both employers and employees but also contributes to a smoother implementation of ESOPs

How can businesses educate employees about the benefits of ESOPs?

A multifaceted communication strategy may involve conducting regular information sessions or workshops to explain the intricacies of ESOPs. Company newsletters, intranet updates, and direct emails about the ESOP can help reinforce key messages and address queries. You could even consider adding a ‘share price indicator’ to your intranet home page.

Your Succession Plus Partner will facilitate an employee information session at launch, as well as provide resources to empower employees to understand the long-term advantages of participating in an ESOP. Reach out today to book a free 30-minute consultation with an advisor for guidance to boost employee retention through ESOP.

How much does an ESOP cost to set up?

Even for small-to-mid-sized businesses struggling to keep their best on the books, the cost of setting up an employee ownership scheme is nominal, especially when compared with the costs of ongoing recruitment and a high staff churn rate.

An ESOP has a low barrier to entry with a total investment of between $10,000 and $30,000, depending on your type of plan. Equity schemes must be created in compliance with tax and legal requirements and need a decent level of education for the owners and employees.

Consider this a BD investment and a small price to pay for the benefits of staff and increased employee retention, boosting innovation and overall profitability.

Empowering employee ownership plans for talent retention

Employee Ownership Plans can be a potent force for talent retention. They go beyond traditional compensation packages, offering employees a stake in the company’s success, financial rewards, and a sense of ownership. Employees who feel that their efforts directly impact their financial well-being and the company’s future are more likely to stay committed, engaged, and loyal.

By implementing ESOPs or other forms of employee ownership, businesses can retain their top talent, build employee engagement and create a culture of shared responsibility and achievement.

As businesses face increasing financial pressures and an increasingly competitive job market, harnessing the power of ESOPs can be a strategic employee retention advantage, ensuring that the best and brightest continue to drive the company’s success while building their own financial futures.

Ready to explore how ESOPs can benefit your organisation’s retention strategy? Reach out to schedule a free consultation with our advisors today.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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