Life used to be simple, the bosses owned the business and received the profits whilst the workers did what they were told and were paid a wage. Workers joined unions, went on strike from time to time and both sides argued about the size of their slice of the pie.
Then things changed. Firstly, there was some acceptance that if all sides focussed on the size of the pie rather than the comparative size of their slice, then everyone could benefit from a bigger pie. By pulling together (sharing ‘goal congruence’ in management speak) then both sides could prosper.
Secondly, there always has been and always will be a battle to recruit and retain talent. As Richard Branson said, “Take care of your employees and they’ll take care of your business”. This led to companies providing employee benefits over and above legal requirements; from gym memberships to employer funded study, from super schemes with additional insurance benefits to casual work wear, from flexible work arrangements to inhouse baristas. Competitive wages & salaries are necessary, but not sufficient. Employees (or the valuable ones) need to be engaged and made to feel like they are part of the team.
It is against this backdrop that ESOPs (Employee Share Ownership Plans) proliferated. A means for employees to become shareholders and participate in the financial success of ‘their’ company. Governments were broadly supportive and encouraged ESOPs through beneficial tax treatments. Employees found that these share plans could become a significant financial investment.
ESOPs are very common in the USA and the UK and most ASX listed entities have such schemes. However, very few SME companies in Australia enjoy the benefits that accrue by implementing an ESOP. Academic studies have shown that ESOP companies are more likely to stay in business, are more productive and generative superior financial results. It does seem that ‘happy hens produce better quality eggs’. Recent tax changes have added further benefits to the ESOP cause.
Finally, ESOPs can be a valuable tool in the transition of the ownership of a business, opening the possibility of an MBO (Management Buy Out) whilst also making the company more attractive to third parties with key staff emotionally and financially invested.
Would Marx have approved? Probably not but share owning employees do seem to have embraced ESOPs.
Baton Advisory is hosting a complementary breakfast in Brisbane where one of Australia’s leading authorities on ESOPs will be speaking. Craig West is currently completing a Doctorate into the use of ESOPs and is the founder and CEO of Succession Plus.