Top 5 key benefits of having an Employee Share Option Plan (ESOP)

Top 5 key benefits of having an Employee Share Option Plan (ESOP)

In today’s marketplace, attracting and retaining top talent poses constant challenges. Gone are the days of your traditional 9-5 job and with it your 9-5 employee. Technology has meant we’re now more connected than ever and we are always ‘on’ regardless of whether we’re physically in the office or on holidays. These changes have created a whole new generation of employees that demand more from their organisations and not just in the form of benefits but through an alignment of personal goals and values. This shift in mental state has also created a highly competitive marketplace where retaining top talent is key to a healthy P&L.

Employee Share Plans have long been seen as a way to align your business goals with employee values in addition to driving productivity and aiding retention. In this article we will explore the top 5 benefits of having an Employee Share Plan in place and how it can benefit your business and retain talents within your company.

1. Promotes employee Involvement

The first benefit is perhaps one of the most important but also one of the most misunderstood values of implementing an Employee Share Plan. Simply put, if you align your workforce and your organisation with a common goal it promotes engagement, invites innovation and drives productivity and profitability. All due to ensuring your employees have a sense of ownership. The implementation of an Employee Share Plan ensures that your employees don’t feel like a cog in a machine, but feel they play a fundamental role in business success. That success then becomes tangible when they see the impact to their Employee Share Plan when the company’s stock price improves.

2. Improved recruitment and retention

Companies that adopt an Employee Stock Ownership Plan (“ESOP”) have seen much better retention rates due to the long-term benefits associated with having an ESOP. Employee Stock Ownership Plans provide employees with ownership interest in the company. Typically, the longer they stay with the company the greater the benefits which is why they can be used in the facilitation of succession planning.

ESOPs can often have tax benefits for employees and company alike so are typically implemented as part of a corporate finance strategy. This makes ESOPs a desirable piece of any employee package and as a result aide in retention of employees. In addition to this with the right Employee Stock ownership Plan a business can create desire within top talent, ultimately benefiting your business.

3. Ability to generate liquidity while maintaining control

If you want to generate liquidity for your business but are concerned about losing the operating control that comes along with selling to a third party then an Employee Share Plan might be a viable solution. With an Employee Share plan in place, owners can choose to sell a minority interest, as little as 20 percent, which will generate the liquidity needed.

The benefits associated are not just for the business owner in this scenario, in the case of employees, it enables investment opportunities that might not otherwise have been viable. Many employees do not have the cash to buy shares, a business who implements an Employee Share Plan changes this through the setup of a trust and selling to their employees. Employee’s will then receive shares over time as a retirement benefit.

4. Flexible and tax savings

Employee Share Plans are often used as a part of a corporate finance strategy for their obvious tax deduction benefits. Many regimes around the world today provides a tax-deductible status for company stock contributions, dividends and cash contributions. Their inception was driven by a need to give employees an opportunity to reap rewards from an increase in the value of the company they work for. In doing so, it also encourages loyalty to a company as well as a vested interest in delivering good work which will grow the company.

5. Differentiation from competitors

It is to be expected that a major benefit of having an Employee Share Plan in place long term is the impact on corporate culture. If you have successfully implemented an Employee Share Plan, strategically aligning your employee and shareholder values, you are bound to see dividends in output due to the sense of ownership. All business operations and interactions will be conducted by a team who is engaged and truly cares about the business beyond their personal monthly paycheck.

This shift in mindset will have long term benefits for the company, fundamentally shifting their corporate culture and creating differentiation in the marketplace. Not only will you become a desirable place to work but your productivity, profits and employee engagement will all increase. Over time, this can become a significant competitive advantage.

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