Corporate strategies let the employees see the higher perspective of the company's future and that they are updated. An employee stock ownership plan increases the employee’s trust in the company and its future.
So, recognizing the importance of directly aligning the employee’s interests with the company goal, it is important to strategize methodically in doing so, and one very pivotal way is through Employee Stock Ownership Plans (ESOPs).
ESOPs encourage employees to have a long-term investment in the company’s overall success. So, what is ESOP? How does it work? More importantly, what are its benefits?
Let's understand.
The Employee Stock Ownership Plan (ESOP) is a plan of benefit that the company offers to the employees to give them a sense of ownership by acquiring company stock. ESOPs help align company goals more responsibly in the minds of the employees.
Because now they view the company not just as an employee but also as someone who owns it, having direct interest in the employee’s financial well-being with the company’s overall success.
Since their financial interests are directly linked with the company’s growth, which leads to increased value of shares, it increases the potential benefits that the employees can incur over time through it as well.
ESOPs are a means to encourage and motivate employees, to promote employee retention, and to make employees feel more committed to the long-term growth of the company, as they can be a good income and contribute to the retirement plan as well.
ESOPs are also utilized when there is a need for business succession planning, wherein they serve as an exit strategy for owners.
ESOP Trust, as the name suggests, is a trust for employees that the company creates in order for it to hold shares on their behalf. The employee ownership trusts hold the shares and distribute them to the employees over time; these employees who now hold shares view the company in the light of stakeholders as well.
The company contributes to the trust by providing cash to the trust to be able to buy existing shares in the company, or they contribute stock of the company to the ESOP trust. These contributions are typically tax-deductible for the company as well.
Employees earn company shares over time, generally based on factors such as salary level or tenure. These shares are held in the ESOP trust and allocated to employees’ accounts.
The organization grants these ESOPs to the employees over time; this is done as a means of buying a specified number of shares of the company at a particular price, especially after a certain period of time.
Before, there was the idea of a vesting period, which entailed that the employee had to work for the organization until a part of the stock option could be bought.
Majority of ESOPs allow employees to buy the company shares at allowed prices that are lower than the market price, this leads to an increase in the contribution of employees in the company's success.
They are also allowed to sell these shares and get profitable investments off of them and is a great employee benefit plan.
The concept of having to work for a certain period of time for the company until a part of the stock option is entirely available for them to buy is the concept of vesting period.
So, as part of the succession plan, if a particular employee leaves the company or retires, the employees receive their ESOP, which they are qualified to either sell back to the company or other stakeholders; it depends on the rules of the plan. This is a great retirement benefit.
The corporation can purchase back the ESOP from the employee as well at fair market value within 60 days of their leaving the company or retiring from the company.
This only highlights the point made before that ESOPs add a direct interest of the employee in the company’s financial success, only adding to the efforts and productivity they offer owing to that as well. This increases the overall corporate performance.
ESOPs are one of the forms of employee ownership. Some other forms of employee ownership include:
Eligible employees are being given the option to buy company stock at an already decided price, so this gives them the opportunity to profit if the corporation stock price increases over time. This highlights the employee stock option plan.
The restricted stock units are more conditional in their offer of shares to the employees; the conditions can be like an essential vesting period like having worked a specified period of time or some other performance milestones that are met. It can also be used in the benefit plan as an incentive given to the employees.
This is a more performance-based sharing of profit or benefit plan. Some companies go on to allocate a certain percentage of their profits to the employees, either as cash or stock. It is not always a direct form of ownership; rather, it is more of a means to reward employees based on them surpassing their performance target.
Worker cooperatives give employees direct ownership and control over their decisions and will for the company which acts as a clear benefit of employees. Employee-owned cooperatives are much smaller and goal-businesses technically. This helps keep the business continuity and elevates the contribution from employees as well.
Very organically, since their direct inclination of the employee toward the financial interests of the company, it is simply an added push to their motivation to stay more committed and loyal to the company and care about the rates of its productivity. There is improved employee engagement and worker retention rooting from such motivation.
ESOPs provide both company and employee income tax benefits. Like when employees receive much favourable treatment and tax benefits, especially at the time when they are selling their shares of company stock. There are other tax advantages as well.
ESOPs definitely act as an additional source of retirement savings for the employees of the company. As the company grows over time, the value of the shares they have bought will also increase, and there will be a great amount of money added to the retirement savings.
It is seen that the very culture of employee ownership is one that increases the overall value of the company when compared with non-ESOP companies. This increase in value directly resonating with the culture of employee ownership that is so observed is typically also talking about how, since the interests and goals of the company and employee are in the same direction, it leads to elevated company performance.
ESOPs provide both the company and the employees with tax benefits. Like the company contributing to the ESOP Trust is tax deductible. This is one such instance where tax benefits are incurred by the company.
Succession planning, wherein for business owners it becomes an effective strategy of exit, wherein they can avail of selling the shares to another employee while still maintaining the company culture.
Managing an ESOP does require careful planning; it also requires compliance with the legal and regulatory requirements as well. But the most important part of it all is the ability to have employee satisfaction as well.
CompUp helps you do just that and more. It offers a platform that is simply designed with the idea of implementing and managing these ESOPs.
With CompUp, employees can track their total compensation, including their stock options, through a Total Rewards Statement with a holistic dashboard.
CompUp’s pay gap analysis dashboard allows you to review stock allocation across different employee groups, ensuring fairness and diversity in your stock distributions.
CompUp does an annual ESOP benchmarking survey to summarise the valuable insights that are related to the Employee Stock Option Plan.
Understanding the importance of aligning the employee’s interests with the company goal, it is important to strategize methodically.
So, a well-made employee stock ownership plan (ESOP) is indeed the solution to providing a great benefit plan to improve employee satisfaction and employee retention.
Click here to learn more about what makes CompUp an all-in-one compensation management platform.
Revolutionizing Pay Strategies: Don't Miss Our Latest Blogs on Compensation Benchmarking
