Establishing a good employee-employer relationship is crucial for the success of your company. Employers can offer employee share plans to improve productivity and employee retention, especially for top talents. On the other hand, your team can also enjoy plenty of benefits when they own shares of the company they’re rendering services to.
But what exactly is an employee share plan, and how does it work? Check the important things you need to know about the employee share plan by reading below.
- Defining Employee Share Plan
An employee share plan is also called employee stock ownership. Most companies offer this program as part of employee benefits. Generally, employees acquire shares via a share option plan.
With an employee share scheme, employees can buy shares or get shares in the company they work for. It’s called an employee share purchase plan with an equity scheme or share option. Employers can offer employee stock ownership plans (ESOP) with the help of an ESOP professional offering digital tools, such as Cake.
- How It Works
Employee stock ownership plans allow employees to become part-owners of their company’s stock. This form of trust hold, acquire, or sell the company’s stock, benefits the employees. The company borrows money from investors, lenders, investors, and selling shareholders. Then, the organization loans employee stock ownership plan or ESOP trust funds to acquire shares.
When the ESOP loan is paid, shares are distributed to employee accounts every year as a proportion to the participants’ annual compensation. Employees will receive cash in exchange for their company shares upon disability, retirement, termination, or death.
- Benefits for Employers
Companies can give employees free or discounted shares. Employers can match shares bought with shares for more marked future profits.
Employee share plan offers many benefits for business owners too, including the following:
- Great Exit Strategy: Private business owners can use ESOPs as a good exit strategy and succession planning when liquidating and transitioning. Also, employers can gain tax benefits while rewarding employees and managers.
- Flexible: Employee share plan transactions enable business owners to withdraw all at once or gradually over time. Employers can sell from a percentage or all of their stock to the ESOP.
- Ensure Continuity of Business Governance: Management staff can retain their positions, enabling for a smooth transition to ensure that long-term suppliers, distributors, and customer relationships are kept.
- Retain Top Talents: Providing employee share plans promotes top talent retention and faster recruitment.
- Tax Advantages: The primary tax advantage of ESOP is to the company because payments made to employee share plans are tax-deductible. For a leveraged ESOP, payments satisfy the debt incurred, so the interest and principal payments made to a selling shareholder or the bank provide a tax deduction to the company.
- Increase Employee Engagement: Acquiring shares means employees effectively becoming co-owners of the company that can be linked to a program to increase employee engagement. More engaged employees boost performance and promote job satisfaction, decrease absenteeism, and promote employee loyalty.
- Benefits for Employees
Employees participating in employee share plans receive unique rewards. When it comes to the types of employee ownership, they include indirect or direct ownership. Direct employee ownership involves employees holding shares or purchasing shares at tax-efficient or discounted rates. A trust owns a company in indirect employee ownership on behalf of participant employees.
Check the following employee benefits of the employee share plan:
- Retirement Benefits: ESOP participants or employees can receive retirement benefits without monetary costs. Many employees are willing to participate in retirement plans, but only a few companies offer them. So, what more if a company provides ESOP?
- Pride of Ownership: Employees can call themselves shareholders or part-owners of the company. They are business partners with the company they work for. Employee shareholders have the opportunity to participate in business decision-making. They can take part in general meetings, conferences, and approvals.
- Tax-Effective Form of Remuneration: ESOP offers financial advantages to employees. For instance, when the share price increases in five years, the participating employees will benefit from the profits.
- Encourage A Savings Company Culture: The ESOP scheme can encourage a savings company culture so employees can better provide for their future. Instilling this good practice motivates employees to be aware of their finances while enjoying working for the company because of extra financial advantages.
Employee stock ownership, in which employees can own shares of the company or the parent company they’re working for. Offering ESOP is highly beneficial for both the company and the participating employees. Employers can use share schemes to motivate, attract, and retain employees, aligning employee interests with their shareholders. For employees, they can receive retirement benefits without spending anything.