So exactly what is an employee share plan, or ESOP? Have you ever wondered how Employee Share Ownership Plans Work?
Employee ownership is a fantastic way for businesses to be driven by employees who are working with an ownership mindset.
They are surprisingly common in the US - with 36% of the workforce in the US being covered by them, whereas just 3% of the workforce here in Australia is. Given these stats, there is a great opportunity for growth in employee ownership mindset here in Australia.
So what are the three points to consider whether a share plan is right for you? Well, one is the size of the business. So there's a couple of stages you might think about in an employee share plan. One is its start up. So generally in a start up, there's some highly specialized technical knowledge required, and you might use an employee share plan to handcuff, or provide an incentive, for key employees to stay with a start up business, for obvious reasons.
The second stage that you might use a share plan is where you get to, say half a million dollars worth of profit, and you really wanna go for growth, and scale the business up, and it's starting to get hard to do it on your own, so the idea is to get some key employee involvement with your business. The second thing to look for in whether an employee share plan's right for you, is whether you want to retain key staff or not, so if there's key personnel in your business, one way of keeping them or incentivizing them to stay within your business structure, is to set up a share plan, so you allocate some of the profit, as I discussed before, over a certain benchmark, they get some share ownership, and then what they do is they start thinking like business owners, which is really what you want your key employees to do.
Statistically speaking, employee share plans' companies tend to have a retention rate for their employees, it's about three times higher than other businesses without them, so they clearly work from that point of view, so you can imagine, you've got two employees. One of them is fully engaged in the business. They'll obviously be wanting to be creative, to make contributions, to come up with ideas, if they see wastage they're far more likely to put a stop to it, whereas an employee who's not incentivized will probably turn up to get paid, and not necessarily make a contribution to the business. Now, we all know that's not true all the time, but it'll make that difference, as proven by statistics.
The third point to consider whether an ESOP might be right for you, is whether you're in growth mode or not. So, by growth, it means that you've got a business that you're ready to accelerate, you're not prepared to sit idly by and just sit in the armchair and watch what happens in the business. You want to actively drive the business forward. So an employee share plan is certainly something that'll help you do that. Statistics show that profit improves by between 8% and 11% when you've got an ESOP in place because the employees that are in the ESOP have an ownership mindset, which means they're involved, and they're highly motivated and incentivized, to increase revenue and decrease costs.
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