“Employee ownership is world-changing. It is the way ahead…in the global economy. It reflects that human capital is becoming more important than physical assets…The global economy will succeed when employees feel a stake in the business.” – Gordon Brown MP – Chancellor of the Excheque
There are many more interesting and creative options for employee incentive schemes than just paying bonuses. Participation in the equity of a business is a key component of an effective reward system. While fixed remuneration rewards the individual for performing the duties of his or her position; and incentive plans help to direct their activities, decisions and behaviours toward the achievement of predetermined short-term goals; a share plan is an essential tool for aligning the employee’s personal goals with the business’s goals in the longer term.
Employee share ownership plans are very common in the US and throughout the EU, while only around six per cent of Australians own shares in the companies they work for. One of the main reasons for this low rate of participation is that many businesses don’t realise that share ownership is applicable to them, but it can be used in any business even those that are not publicly listed on an exchange. Equity replicator plans can replicate the operations of share plans without the need for shares. These plans create units, which represent notional equity, and awards are calculated by using a formula that measures business value.
In 2003 the federal government launched its employee share ownership policy with the goal of assisting small to medium-sized Australian businesses (through the provision of services) to increase their employees’ participation in share ownership plans. The government recognises that such plans benefit both employers and employees by aligning their interests and goals; by enabling employees to directly benefit when their employer does well; and by enabling employers to benefit from a more committed workforce.
Share plans that first provide for the owners to receive
an equitable return (profit) on their risk and capital, and then allocate a percentage of additional profits to a pool for employees to share in, vastly improve the profits of an organisation, while promoting teamwork, common goals and group achievements. Strategically planned and executed employee share plans can also help businesses and their staff to achieve a number of other goals, for example:
Succession Planning
According to the 2003 RMIT University Family and Private Business Survey, the average age of a family business owner in New South Wales today is 56 years, and 68 per cent plan to retire within the next ten years – over the next decade the retirement of family business owners will see the transfer of approximately $1.6 trillion in wealth, which surely must make succession planning one of the most significant issues facing small business owners today.
Employee share ownership schemes can significantly assist in the transition of business ownership. For example:
- In the case of a management buy-out, the ability for staff to acquire equity (through an employee incentive scheme that includes share options) can facilitate the transfer of ownership over a period of time.
- In the case of an external sale, an employee incentive scheme can help to increase the value of the business; prospective buyers will be prepared to invest more in a business where the employees’ financial interests are aligned with those of the employer. (You’ll find more on succession planning in my book, Enjoy It.)
Capital Retention
The opportunity to raise capital from within the business, rather than from external investors or lenders can be an attractive option which enables control of the organisation to remain in-house, while giving employees the opportunity to share in equity and profits.
Wealth Creation
Contributions to investment vehicles created as part of an employee share ownership scheme can offer employees the ability to invest pre-tax dollars, which is a unique opportunity for wealth creation that is particularly attractive to people who have the financial capacity to save on a regular basis.
Asset Protection
The use of trusts as investment vehicles can provide asset protection for both employer and employee. In the event that either the employer or a participating employee experiences financial difficulties, to the extent that funds invested in an employee incentive scheme are held within a trust (rather than by the employer), those funds will be protected from bankruptcy trustees. (For more about asset protection, request a copy of my book, Protect It.)
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