ESOP Tips: Alternatives To Employee Pay Cuts
If your company is seeking alternatives to employee pay cuts, has plans to reward some key individuals or all employees in your business, one good option to consider is an employee share scheme. It allows you to share company ownership with the members of your team. And, while it’s sometimes best to implement a different type of ESOP, or Employee Stock Ownership Plan, for external people, this option may also be applied to advisors, consultants, and other non-employees that are involved in your business operations.
Common Forms Of ESOP
- Share Purchase Schemes – In this form of ESOP, you’re going to offer shares for sale to your employees at a favorable price.
- Share Option Schemes – This form of ESOP gives your employees the option to buy shares in your company later on at a price you set upon granting the option. Please take note, however, that your employees have the right to purchase at the originally agreed price even if share prices increase after the date the option was granted.
- Share Gifting Schemes – Your company will basically gift shares to your workers when you choose this ESOP form. The shares will be held on trust for a specified period.
Setting Up An ESOP: What Is It For?
A company may consider running or setting up an employee stock ownership plan for a variety of reasons. These include the following:
- Businesses want to reward employees in a tax-efficient way.
- A company can add ESOPs to the benefits package since they’re popular and attractive when recruiting potential employees.
- If a company is considering implementing pay-cuts to keep the business afloat during this challenging period brought by the coronavirus pandemic, a good alternative is an ESOP to ensure that employees don’t lose motivation or consider changing jobs.
- ESOP decreases absenteeism while helping employees obtain a more holistic perspective involving the whole company. They, then, develop a longer-term view in terms of company performance.
- If a company wants to create an atmosphere of trust and shared enterprise for its employees, ESOPs go a long way in helping transform the company’s culture.
- ESOPs improve retention and morale since employees will feel more loyal.
- The success of the company becomes a shared objective for the management, and employees as workers feel more connected and their job satisfaction improves after owning shares.
- ESOPs have a positive effect not only on the productivity of each worker but also on the overall company performance.
How Do Employee Stock Ownership Plans Work?
The good thing about Employee Stock Ownership Plans is that they’re highly customizable to suit the specific needs of a company. They come in different shapes and sizes, working slightly different from each other.
It’s essential to figure out the motivations of your company for giving employees equity before you proceed in the designing of your scheme.
You can start by answering the following questions:
- In terms of asset value and team size, how big is your company?
- If people leave the company, what exactly do you want to happen?
- Before releasing the equity, do employees need to reach some performance milestones first?
- Who do you want to benefit from ESOPs: employees, non-employees, or both?
- Would you like your employees to purchase shares in the future, or would you want to give the shares right away?
The answers to these questions will help you understand some basics about your company and, most importantly, what you’re really trying to accomplish with an employee stock ownership plan.
Here are some essential ESOP tips for you to ponder upon before finally launching one
1. Be Clear About Your Motivations
What are your motivations or objectives? Do you want to focus on the psychological aspect and let your employees know and feel that they’re not only part of the team, but that they’re your partners as well? Or, do you just want to provide rewards to deserving employees and create a more productive work environment? If that’s the case, then, what would the setup be? Is it going to be sharing in profits through capital growth, dividends, or both? Make sure that you have these things clear in your mind.
2. Finalize Your ESOP Setup
Do you want to limit the ESOP to your key people, or you want all of your employees to become shareholders in your company? If you favor the former, then, individual share ownership might be the better setup for you. Ownership through a trust, on the other hand, may work best for the latter.
3. Decide Whether Or Not Employees Still Have To Pay To Acquire Their Shares
Finance share purchase can be difficult for most employees, even for those who hold senior-level positions. What you can do to help them is to either give bonuses that workers can use to acquire shares, grant options (as described by the share option scheme), or make shares free. Of course, the decision is entirely up to you, which also depends on your goals for setting up an employee stock ownership plan.
4. Review Your Plan Carefully
Have your tax and legal advisors analyze your desired result. Always remember that it’s crucial to get the right form of ESOP based on your needs. It’s especially true if you want to afford tax benefits for both your company and your employees.
5. Communicate Your Plan
Communicate to your employees the final structure for the ESOP. Make the benefits clear to them. Work with your advisors to successfully carry out the communication.
Never straightly opt for a standard solution. While it’s true that some kinds of ESOPs commonly work for particular types of businesses, every company is still different and may have unique needs. The tips above should help you set up a plan that’s right for you.