Employee Share Ownership Plan (ESOP) & Employee Performance

This article provides insight into the best ways to improve employee performance using an employee share plan. Numerous studies have shown that employee share plans are an effective way to incentivise and motivate staff, leading to improved performance and productivity. In this article, we will explore the benefits of employee share plans, discuss the different types of plans available, and provide practical tips on how to implement and manage these plans effectively.

Introduction:

Employee share plans are an increasingly popular way for companies to incentivise and reward their employees. These plans provide employees with a direct stake in the company’s success, aligning their interests with those of the business. By doing so, employee share plans can help to improve productivity, job satisfaction, and retention rates. In this article, we will explore the best ways to improve employee performance using an employee share plan.

Benefits of Employee Share Plans:

Employee share plans offer numerous benefits to both employers and employees. From an employer’s perspective, these plans can help to retain key staff, encourage employees to work harder and smarter and foster a sense of ownership and loyalty. For employees, share plans can provide a valuable financial incentive, giving them a tangible stake in the company’s success. Studies have shown that companies with share plans tend to perform better than those without, with higher productivity, profitability, and growth rates.

 Different Types of Employee Share Plans:

There are several different types of employee share plans available, each with its own unique features and benefits. These include:

5. Stock Options: This is a common type of employee share plan in larger corporates and is also often in the USA, where employees are given the right to purchase shares in the company at a discounted price.
6. Restricted Stock Units (RSUs): With RSUs, employees are granted shares outright, but these shares are subject to certain restrictions and vesting periods.
7. Employee Stock Purchase Plans (ESPPs): ESPPs allow employees to purchase shares in the company at a discounted price, typically through payroll deductions.
8. Performance Share Plans: These plans reward employees based on the company’s performance, with shares issued once certain targets are met.
9. Peak Performance Trusts: The trust structure allows for simplified administration and improved confidentiality as well as providing an orderly way for employees to earn and/or buy shares. Using the Australian tax concessions for Employee Shares Schemes ( ESS ) provide significant benefits for employees, who in many cases can defer taxation on contributions made to the share plan.

Implementing and Managing Employee Share Plans:

To get the most out of an employee share plan, it is essential to implement and manage it effectively. Here are some practical tips for doing so:

5. Communicate clearly: It is important to communicate the benefits of the share plan to employees, explaining how it works and what they stand to gain.
6. Set clear targets: Share plans are most effective when they are tied to specific performance targets, such as revenue growth or profitability.
7. Monitor progress: Regularly monitoring and reporting on progress towards these targets can help to keep employees motivated and focused.
8. Offer training and support: Providing training and support to employees can help them to understand how the share plan works and how to maximise their benefits.
9. Encouraging engagement: Employees know what is happening in the business and where there are any gaps or inefficiencies. They also have lots of good ideas for improvements. Engaging them in the process and asking for suggestions is easy but has a huge impact.

“Do you know how much faster I can fix an aeroplane when I want to fix it than when I don’t want to fix it?”  — Gordon Bethune

Conclusion:

Employee share plans are a valuable tool for improving employee performance, incentivising staff, and driving business success. By implementing and managing these plans effectively, employers can create a more engaged, loyal, and productive workforce, while employees can benefit from a valuable financial incentive. With the right approach, employee share plans can be a win-win for both employers and employees.

References:

– Chen, T., & Wu, Y. (2016). Employee stock ownership plans, corporate governance, and firm performance. Journal of Business Research, 69(11), 5118-5123.

– Hermalin, B. E., & Weisbach, M. S. (2017). Employee representation in corporate governance. Journal of Economic Perspectives, 31(4), 129-152.

– Kim, K., & Kim, K. A. (2017). Employee stock ownership and corporate financial performance: A meta-analysis. Journal of Management, 43(6), 1674-1703.

– Liao, Q., & Wong, T. J. (2019). Employee stock options and corporate innovation. Contemporary Accounting Research, 36(4), 2346-2370.

– Rajgopal, S., Shevlin, T., & Zamora, V. L. (2018). Employee satisfaction, labor market flexibility, and stock returns around the world. Journal of Financial Economics, 128(3), 585-609.

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.