employee share plans

  • Date:01 Nov 2005
  • Type:CompanyDirectorMagazine

Employee Share Plans
Getting it right the first time

 

Having equity in the company for which you work has become increasingly popular and it certainly eases shareholder concerns when they have a non-binding vote on remuneration for senior executives. As Owen Thomas reports, employee share plans also make sense as long as you get it right

 

The benefits of increased employee corporate knowledge and interest in the “profit” side of the business that employee equity ownership creates can only be fully accessed by the employer when there exists wide and meaningful employee participation.  Although some benefits can be accessed at lower levels of participation, wide and meaningful participation requires the involvement of more than 65 percent of employees owning more than 10 percent of the company’s market value.
Obtaining such levels of participation can be difficult without significant communication and support from the employer. Employee equity strategies require ongoing maintenance for best results.
There are three main ways an employer can increase participation in an employee equity plan strategy:
• Comprehensive and timely advice of the employee equity offer;
• Support for employees to buy in on a preferred basis; and
• Continued promotion to employees of the value and benefits of their employer equity ownership.
To help employees make a decision about buying into a company they need the full details of the general terms and conditions of the offer and independent financial advice regarding their own financial position.
In practice, few employees seek independent financial advice.  Even though it is not in his or her best interests, the employee will often determine participation in such schemes based only on the information from their employer.
Employers need to communicate the advantages and disadvantages of the offer in a way that provides confidence to the employee that they are not “being fed a company line”. Only then will employees feel confident enough to make a positive participation decision.
The written information provided with the offer needs to be professionally produced and written in a way that meets both legal requirements and the needs of employees for general information regarding share investments.
Participants need to be satisfied that they are getting the complete picture.
Presenters at employee information sessions must be fully informed of the terms and conditions of the offer and be able to provide general information regarding taxation and social security outcomes. The employer needs to build an information and experience bank within the employees to provide momentum to the employee equity strategy.  The faster this knowledge bank is created, the faster the benefits of general employee equity participation will be achieved.

Incentives
Employees rely on the business for their income. The additional risk that investment in the business through an employee equity strategy creates generally requires the employer to provide incentives to employees to participate.
With anywhere between 25 and 30 percent of employees not having the financial ability to salary sacrifice to purchase shares in their employer’s business, incentives are important.
Costless administration and financial benefits to enable employees to buy shares in the employer on a preferred basis or free or discounted shares are just two of the ways employers can build interest in employee ownership schemes.
Employers can off what are termed “matching shares”. The employer provides equity (matching shares) in addition to any employee shares purchased through salary sacrifice.
The provision of employer support is very effective remuneration.


Maintaining interest
Keeping employees in the information loop once they have shares in the business is vital.
Employers need to provide employees with regular updates regarding shares purchased, performance hurdles and investment valuations to provide them with ongoing reinforcement of the value of their equity and regularly re-offer the scheme to capture the interest of new employees or those who did not take up the initial offering.
Those updates give the business an opportunity to remind employees of their investment in the company and maintain their confidence at times when adverse movements in the share price or difficult business conditions may cause concern.