Posts Tagged ‘Employee Share Plan’

A study of Australia’s fastest-growing businesses has discovered that they key element for growth is an environment in which staff want to learn and apply new knowledge creatively.

The study, conducted at RMIT’s School of Management, quizzed 253 companies that have achieved growth of between 35% and 600% over the last four years.

“Fast-growth SMEs are the high-power engines of our economy, comprising only 3 to 10 per cent of firms but generating up to 90 per cent of employment growth,” Dr Tan ( the lead investigator ) said.

The significance of what Dr Tan calls “learning orientation” emerged from the study, as many of the fastest growing companies studied had created an environment in which staff are committed to constant learning.

“These businesses know knowledge is power,” Dr Tan said. “It has always been said that learning is the only source of competitive advantage. You can learn from competitors, suppliers, anyone in industry.” Businesses that recognise this empower staff to learn, both formally and from trial and error. Teams are encouraged to learn from members’ efforts, so failures become as learning experiences not negatives deserving of censure.

Dr Tan said the study “Also found that rewards associated with performance do not make employees more market oriented or customer oriented. Money can’t buy creativity.” Willingness to learn, however, can achieve those outcomes because staff who want to learn will pick up the knowledge they need to understand the market and will ensure they have – or seek out – the knowledge to satisfy customers.

Tactics Dr Tan has observed which businesses use to create learning orientation include open question and answer sessions among staff, or adoption of social networking tools like Yammer to encourage collaboration. Physical environment is also important, Dr Tan said, as a pleasant one will stimulate staff to higher efforts.

The research by Dr Tan, Professor Kosmas Smyrnios and Lin Xiong in RMIT’s School of Management showed there was no significant relationship between reward-related human resources practices and learning orientation.

“Benefits and bonuses have their role, but they do not necessarily mean employees are committed to learning or to the goals of the venture,” Dr Tan said.

“In contrast, our study indicated that learning orientation in a firm is only enhanced when high levels of motivation are maintained and employees are treated as valuable resources.”

A record 12,500 UK organisations operated at least one of the four tax-advantaged government share schemes last year, according to the Employee Share Ownership Centre’s (Esop) annual analysis of statistics from HM Revenue and Customs (HMRC).

The report, Employee share schemes statistics for 2009-10, published by HMRC on 30 June, showed that some of the four government-approved schemes, which include sharesave, share incentive plans (Sip), company share option plans (Csop), and enterprise management incentives (EMI), are in decline.

Of these schemes, only EMI fared better than the previous year. HMRC reported that 10,610 organisations operated an EMI scheme in 2009-10, an increase of 110 on 2008-09.

Malcolm Hurlston, chairman of Esop, said: “EMI is inexpensive to the public purse as, on the whole, if an organisation offering such a plan does well the extra tax revenue generated covers the relief given.

“The government can do more to promote the scheme with better liaison between the Treasury and business. It seemingly answers the coalition’s prayers as a cheap way to encourage growth in the [small and medium-sized enterprises] sector.”

The number of employees to whom options were granted under the all-employee sharesave increased by 120,000 staff, nearly 20%. This is despite 70 fewer organisations operating such a plan.

The number of employee owners was nearly 10 million in 2010 in large European companies (out of 32.6 million employees). The number of companies that have employee ownership was increasing (91.7%), as well as those having share plans for all employees (53.7%) and those with stock option plans (64.1%).

However, significant differences can be seen between countries: A significant increase in the number of employee owners in Spain, Poland, France and the Nordic countries (Denmark, Sweden, Norway, Finland), contrasting with a significant decrease in Belgium, Ireland and The Netherlands.

Overall, the capitalization held by employee owners rose back to 192 billion Euro in 2010. In % held, there was a slight decline for the first time for many years (from 2.82% to 2.71%). However, the share held by Top Executives has increased, while it is the “common” employees who have seen their share shrink.

All details are to be published in May in the next “Economic Survey of Employee Ownership in European Countries in 2010″. We will update this report to the blog when released

Employee owned companies outperformed the FTSE All-Share in 2010, according to the UK Employee Ownership Index (EOI) published by Centre member law firm Field Fisher Waterhouse LLP. Employee owned companies’ share prices were up 16.3 percent, performing better than the FTSE All Share companies’ share prices, which went up by 11.3 percent over the year. The EOI, compiled by the firm’s equity incentives team, monitors the share price performance of listed companies, comparing the performance of 4 FTSE All-Share companies with companies that are more than ten percent owned by employees. Analysis of 2010 shows that in the final quarter employee owned companies also outperformed the FTSE All-Share, with shares up 11.5 percent compared to FTSE All-Share company share prices, which were up 6.8 percent.

The EOI shows that over 18 years, employee owned companies have outperformed FTSE All-Share companies each year by, on average, 11 percent. Over successive three-year periods they have outperformed by 38 percent and over five-year periods by 74 percent. An investment of £100 in the EOI in 1992 would have been worth £860 at the end of December 2010 whilst the same investment in the FTSE All-Share Index would be worth £249.

The exit rate and preferred exit options are key issues to family businesses. The quickening approach of the baby boomers bubble and the fact that family owned businesses represent $1.6 Trillion in value correlates to a large number of business owners searching for an exit strategy to ensure the return on their equity in their business.

Employee share plans (ESOP) provide an effective equity extraction strategy for the business owner in terms of:

• Funding an exit;
• Compliance and corporate governance issues;
• Delivering improvements in performance; and
• Achieving business continuity after the owners exit.

An ESOP provides a practical solution to an exit strategy fraught with incompatible timetables, lack of funding and inadequate structures. It is the structured approach for transferring ownership whilst facilitating the smooth exit of current owners. A study conducted by KPMG in 2006[i] on family businesses indicated that selling businesses to employees, management and other owners was the second most popular choice following selling in the open market. There is thus a great need for the use of ESOP’s as a vehicle for transferring ownership to facilitate smooth exit of current owners.[ii] This tool is very popular in the United States, with nearly half of all ESOPs there used by private firms to buy-out an owner. It also positions the business as a more competitive employer and attracts and retains key staff. 50 % said securing the right talent / finding competent staff was the number one issue and retaining them was also highly ranked with 16 %.

How does it work?

The decision to implement an ESOP is not for every business, however, if found to be suitable provides a viable exit strategy for the business owner and enables the business to continue operation. The plan provides a structure and mechanism for a profit share to be provided to staff solely for the purpose of purchasing equity in the business with those funds being reinvested into the equity of the business rather than taken at as cash payment.

“The succession plan offers another dimension and long term outlook for key staff that often they never get. The result is truly a WIN / WIN outcome for exiting owners who want the best for the business and to achieve the best sale price for the asset, and for their employees – the people they need to make the results consistently improve.” LJ Hooker Commercial Central Coast has had a Peak Performance Trust (ESOP) in place for four years and was recently awarded 2010 Employee Share Plan of the Year by the Australian Employee Ownership Association. This plan operates over an extended period and has considerable success in attracting, retaining and motivating key staff within the business who now have a vested financial interest in maximizing the value of the business for the owners and the staff.

The preference of implementing an employee share plan as opposed to other exit strategies ( or in fact as stage one of an overall exit strategy )  is gaining momentum in Australia and is equally gaining popularity amongst SME’s. The reason -  great benefits are realised to the business owner, the employees and the business through improvements to retention, motivation, performance, productivity and profitability.