Employee Shareholder Plans

Employee shareholder plans, otherwise known as employee stock ownership plans (ESOP), are plans that offer employees part-ownership in the company through the allocation of shares. They are often used as a corporate finance strategy to align the interests of the employer with those of the company, and come in a variety of forms. Participants can buy stock directly, or it can be offered to them as a bonus. Participants usually benefit from a range of tax breaks on their stocks. So why are many companies jumping on the ESOP bandwagon?

From an employer’s perspective, shareholder plans are generally seen as a way to make the company more attractive, to encourage employees to stay with the company long term, and to align the interests of the company with that of the employee. A 2012 study by the University of Loughborough found a number of benefits to share ownership on employees’ attitudes and behaviours. They discovered that those who participate in ESOPs are more motivated and committed to their employer, and produce better quality work. Furthermore, half of employees said that such plans incentivised them to stay with their current employer for longer. States can also legislate in favour of these policies. For example, in the UK the employee pays no National Insurance tax on the first £2000 worth of shares.

But despite the numerous benefits, there are some downsides to shareholder plans. One problem is that the employee has placed all their eggs in one basket. This means that they can be too overexposed to the fortunes of the company’s shares. If the company loses revenue, sees its shares stagnate, or goes bankrupt, it represents a lost investment. This can affect employee morale. There is also the danger that, if shares are distributed equally, the harder working employees will come to resent those who underperform, given that the value of the company’s stocks are tied to the combined performance of its workforce. There are also costs incurred by the company in setting up an ESOP, including legal and administrative costs in drawing up the scheme and getting it approved.

Employee shareholder plans have a lot going for them. There are many reasons to entice a company to adopt such a scheme for its employees, and there are demonstrated success stories.According to engineering and consultancy firm Burns & McDonnell: “Our employee turnover rate is 4%—the national average is just over 16%—and we believe our ESOP is a big reason for this. The ESOP model cultivates a genuine sense of ownership that permeates through our entire corporate culture, and encourages long-term thinking by tying our retirement savings to the success of the organization. People stick around to see that come to fruition”.

Many of the top companies to work for in the Fortune 500 use employee shareholding schemes, including EOG and Starbucks. Various studies, including that of the University of Loughborough, have shown conclusively that the benefits of ESOPs generally outweigh the costs. Among other advantages, they help to motivate employees, align the views of both employee and employer, and drive employees to do higher quality work. In addition, there is a demonstrated effect of employees being more committed to their employer, and staying there for longer. If it works for the best, it will work for the rest.

Adam Watson