ESOPs – An Employee Retention Strategy

According to Forbes magazine, Employee Share Ownership Plans (ESOPs) should be considered as the “first, not last, resort” in contemplating a retirement or succession plan. The article was written by Mary Joseph, an accomplished entrepreneur with nearly 3 decades of experience with ESOPs who have structured over 300 business transitions, and details that ESOPs increase employee engagement and improve a company’s performance.

“Employees are a company’s greatest asset” – Anne Mulcahy.

The quote above has become a widely understood fact; because behind every business’ success are hardworking and motivated employees. However, the high employee turnover ratio rates start-up companies generate present significant costs to a business, causing new businesses to take at least seven to ten years before seeing success. ESOPs combat this challenge – as apparent through the Australian Taxation Office empowering new businesses to utilise the scheme to attract highly qualified talent and retain them. This is due to the various benefits employee ownership (EO) offers.

According to Stuart Reynolds, founder of the award-winning accounting firm Fullstack Advisory, ESOPs act as a major incentive for staff to be driven to meet and even exceed personal and company key performance indicators (KPIs).

A business’ workforce will also be highly motivated to be innovative and engaged when working towards a company’s goals in order to grow their share value which will naturally increase all shareholders’ holdings, keeping the business afloat and successful. Additionally, ESOPs encourage teamwork amongst employees and managers which increases overall business morale, hence keeping employees satisfied with their position and role within the business.

Therefore, ESOPs are evidently effective in motivating employees to be hardworking and contribute towards business profitability; or in the words of Bernie Sanders, highlighted in The Intercept’s ‘Could expanding EO be the next big economy policy?’, “when employees have an ownership stake in their company, they will not ship their own jobs to China to increase their profits; they will be more productive.”

Furthermore, economic sociologist Joseph Blasi, champions ESOPs as he believes they benefit both workers and companies. Employees in ESOP companies tend to earn 5-12 percent more in wages and have retirement accounts that are 2.2 times larger than those employees at traditionally owned companies in the USA according to a research on EO by the National Center for Employee Ownership (NCEO), with similar patterns occurring in Australia. Similar to enhanced employee motivation and work morale, these reasons also lead to a reduction in employee turnover rates in ESOP companies which saves companies from costs associated with resignation and recruitment. Additionally, the myth that business ownership is automatically diluted the moment a company creates an ESOP is just that, a myth.

ESOP members are involved in management decisions and strategies to grow market share however, they do not directly manage business operations or oversee the day-to-day running of a business. Offering EO incentives through ESOP instead of providing high salaries would also promote a business’ cash flow and thus, overall financial position. Hence, ESOPs not only advance employees’ financial positions, but also companies’, resulting in higher rates of staff retention.

Check out our webinar to find out which ESOP is right for your business, or download our ESOP whitepaper to learn more.