The basic proposal is simple. People work better when they work for themselves. That’s why businesses owned by people who work in them are likely to be more successful than those owned by others. That’s why companies should offer an Employee Share Ownership program.
The Main Advantages of Companies That Establish Employee Share Ownership
The key advantages of the Employee Share Ownership Plan (ESOP) are:
- Align employee interests with those of employee shareholders
- Compensate employees for lower salaries and relieve cash flow pressures
- Increased innovations
- Increase shareholder value
- Motivate employees to keep them productive
- Increased employee loyalty and staff turnover
- Recruit new employees and retain key current staff members
- Lower the cost of employee supervision
- Increase customer loyalty
- Improve communication between managers and employees while increasing cooperation
- Increase employee job satisfaction
The Disadvantages of Establishing Employee Share Ownership
There are some disadvantages to this type of plan:
- If the company’s share price does not increase and the employee does not feel they have any control over the share price, it may affect retention and morale.
- There are some costs commonly associated with the administration and establishment of the ESOP.
- Share ownership, specifically option plans may be dilutive, since shares are:
Benefits to Employees
The main benefits to employees include:
- Financial rewards which may be linked to both individual and organizational performance. It may also be linked to ownership structures and long-term savings. Take a look at Commonwealth Bank – they offer an employee share acquisition plan and it’s something employees feel empowers them and also impacts on their share price for the reasons below.
- Employees will have an association with the enterprise and increased sense of “ownership”.
- Improved awareness of the “big picture” decisions, corporate plans and directions.
- There is better communication and partnership between employees and management.
- ESOP are linked with employee involvement and engagement. This present the opportunity to influence process and product decisions.
Risks for Employees
ESOPs can go wrong, if not properly structured. Some of the potential risks are:
- Employees have their eggs in one basket. Essentially employees are overexposed to company shares. If the company does not perform well or goes into administration, the employees will lose their investment. This problem may be minimised by limiting the shares or amount of the salary an employee is able to purchase.
- The share price may decrease over time and have an impact on the value of the employee’s holdings.
- The employee may not feel that they have any influence over the performance or share price. As a result of these feelings, they may believe the plan has no value.
These are the pros and cons of these plans and as with anything in business, you may need to look at the risks and rewards to determine whether they work or don’t for your business.