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Make your team partners with Employee Share Option Plans (ESOP)

Make your team partners with Employee Share Option Plans (ESOP)

You may have been hearing a lot about Employee Share Option Plans (ESOP) recently and may be wondering what exactly are they and why would you need one?

Well, Employee Share Option Plans fundamentally work under a simple premise. Some of the most driven employees are often those that feel as if they have a stake in the business. Put simply, the best way to make someone feel as if they own ‘the place’ is to make them an owner.

It also has been beneficial in the aftermath of COVID-19, where companies have been forced to reduce costs and, for many, this has contributed to a decrease in the hours and wages of valued workers. These adverse impacts will only be magnified with the end of the Job Keeper program. For established businesses it has enabled them to provide an incentive to retain key staff at a time when their salaries may have been reduced.

For start-up businesses, the secret to their growth and success is to have a team of talented employees who can push the business towards its goals. At this stage of growth, most start-ups do not have the financial capacity to offer top-tier wages to gain and retain talent in their workforce.

A great way to compete with higher-funded businesses is to consider implementing an employee share option plan that can attract, retain, and inspire new talent to enter and remain with the business long-term. It also allows companies to help their employees share in the success of the business and create a sense of ownership in the place that they head into every day for work.

 

What is an ESOP?

An ESOP is where employers offer employees shares in the company or an option to acquire shares at a later date. If the business offers options to acquire shares, they are vested over time, which means that ownership of the share options will not be given immediately, but will be subject to the employee meeting performance goals or hurdles.

Normally an employer would be subject to Fringe Benefits Tax (FBT) if they were to give their employees the benefit of shares in the company, however if the appropriate legal documents are drafted to satisfy the tax rules associated with ESOPs, the company will not be subject to FBT.

ESOPs can be used:

  • as a form of compensation to make up for the difference in salary and wages against the job market;
  • as a bonus for reaching companywide short and long-term objectives; or
  • as an annual bonus to retain existing key employees.

Depending on how you create your ESOP, you can have employees sell their shares back to the company when they leave.

 

What are the advantages? 

  • Increases shareholder value as employees interest aligns with shareholders.
  • Incentivises and motivates employees to work towards growing the company.
  • Allows businesses to offer benefits or compensate personnel without impacting business cashflows.
  • Retention of key talents as it gives them reason to stay with your company for the long-term, rather than joining a competitor with deeper pockets.
  • Can counterbalance reservations employees have about salary reduction or deferred pay rise when being asked to take on more or different responsibilities.
  • Reduction in employee supervision as they have a more vested interest in taking more responsibility for their work duties.
  • Encourages employees to create more value through their work, which leads to engagement and innovation to solving key problems.
  • Improve job satisfaction, productivity, and job satisfaction.

 

What are the risks?

  • Adverse tax implications for the employee if the ESOP is not planned and executed appropriately.
  • Dilution of shares, meaning the company owner’s share ownership shrinks.
  • There are running costs involved in establishment costs, administration, legal, accounting and tax requirements.

 

Overall, where the ESOP is planned and executed appropriately, the advantages greatly outweigh the risks.

It is important to understand that the true benefit of an ESOP is only fully realised over time. Employers need to think carefully about the structure of their ESOPs and what they want to achieve from implementing the plan.

If you think that your business will benefit from having an ESOP in place, please get in touch with the team at ABA Legal Group and we can have a plain English, no nonsense discussion about how ESOPs can help you.

 

 

The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.

Steven Cantrill
Got questions? Speak to our team of experienced tax and corporate lawyers today.


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