Employee Stock/Share Ownership Plan (ESOP) as a Motivational Tool in SHRM

 

What is an Employee Stock Ownership Plan

Employee Stock Ownership Plan (ESOP) or Employee Share Option Plan or Employee Share Ownership Scheme is a form of qualified retirement plan. It is similar to a profit-sharing plan, except that an ESOP is required to invest primarily in ‘employer stock’ instead of marketable securities or mutual funds (Dunkleet al., 2010). It allows eligible employees to gain an ownership interest inside the plan in their corporate employer on a tax-deferred basis. Because of the tax advantages that have been granted to an ESOP, it is beneficial to the owner and the company.

The basis of employee share ownership is built in a variety of perceptions such as Finance, Financial Economics, Labor Economics, Corporate Finance, Human Resource Management, and Industrial Relations.

In principle, by tying worker pay more closely to firm performance and involving workers in decision-making, employee ownership arrangements can help reduce the principal-agent problem in the workplace and increase performance (Kruse et al., 2003).

Appelbaum et al. (2000) and Becker et al. (2001) all found that the new systems of participatory work practices have substantial effects on business performance while isolated changes in individual work practices do not generally improve performance.

Also, ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits (Ranaweera, 2010).

An ESOP program is essentially an option provided to employees of an organization to buy an allotted share of the equity at a future date, at a price determined at the time of grant. The employee benefits if the stock price moves up, and the difference between the grant price and the market price at the time of vesting is the benefit. It is still a right, but not an obligation for the employee to buy the shares (Ramkumar V.).

The following is the objective of ESOP

• Reward Performance-Linking ESOP value to performance is a motivating factor.
• Enhance Retention-Perceived value of future benefits retards attrition rates.
• Attract Talent-ESOP becomes a close substitute for financial benefits.
• Reward Loyalty-Value of the grant being directly proportional to years served.

Integration of typically intended objectives of ESOP

Key principles in ESOP (According to the Australian Employee Ownership Association, 2007).   

1. Structure of share plan

2. Amount of shares

3. Transparency and Accountability

4. Non-performance share-based payments for employees

Advantages to Employees from Employee Share Ownership Plan

Through their ESOP accounts, employees become part owners of the business. The value of their stock interest is tied directly to the future performance of the business. Therefore, an ESOP has proven to be a considerable incentive to motivate employees, both individually and collectively, to work efficiently with a view toward the bottom line (Dunkleet al., 2010).

Dunkleet al., (2010) further explained an ESOP program is essentially an option provided to employees of an organization to buy an allotted share of the equity at a future date, at a price determined at the time of the grant. The employee benefits if the stock price moves up, and the difference between the grant price and the market price at the time of vesting is the benefit. It is still a right, but not an obligation for the employee to buy the shares.

Kruse (1996 cited Christophe, 2011) also identifies other motivations for implementing profit-sharing plans, such as:

·          Enhancing workplace cooperation and productivity,

·          Increasing compensation flexibility, and

·          Gaining tax incentives.

Based on a sample of 230 French firms, Guedri and Hollandts (2008) identified an inverted U-shaped relationship between employee ownership and firm performance.

Employee ownership is an opportunity (or a demand) to push (and perhaps pull) decision-making downward. Participation in decision-making requires that managers are willing to share decision-making with lower-level workers and that lower-level workers are actively willing to share responsibility for decisions (Bartkus, 1997).

Knapp et al., (1988 cited Bartkus, 1997) stated that Managers are generally fearful of workplace democracy and avoid sharing decision-making with employees. Some managers may be worried about losing their jobs.

According to Weisbord (1988), increasing autonomy and decision-making at lower levels of an organization can reduce the number of managers and supervisors. Other managers believe that participation leads to mediocrity, instability, and lack of accountability (Ross and Collins, 1987). However, contrary to managers’ expectations, decisions reached through participation were well-informed and accountability increased (Ross and Collins, 1987). Therefore, ownership plans are given the prospect to distribute decision-making power among employees.

The Employee Share Ownership Plan in SHRM

According to Ownership Associates Guidelines, ESOP is another strategy that seeks to engage employees by aligning the financial interests of the company with the financial interests of the employee. This strategy seeks to create a company in which every employee feels an individual “profit motive” to maximize the success of the company. This strategy yields vastly different results from company to company, depending on a number of factors, including workforce characteristics, management commitment, and prudent implementation.

71% of companies which are surveyed by the ESOP Association in the United States have improved their employee productivity levels due to the ESOPs (Ramkumar, 2009). Employee Owned Companies based on the concepts of employee participation and control have shown that most countries are able to compete effectively with more traditional companies (Gates, 1998).

According to the study by Kaewpradab (2006), employees are satisfied with their job opportunities and promotion, followed by welfare, transportation, insurance, and entertainment activities. The study also showed that employees still need to be a part of an organization which is consistent with social needs in Maslow’s theory.

Conclusion

Considering all the above factors organizations can use the ESOP as a motivational tool for the employees where they can retain valuable employees while applying internal and external controls or regulations over the ESOP. 

When the employees get mature they think about the long-term benefits rather than regular benefits. Therefore if organizations can give this kind of long time benefits it will be a morale booster for employees.

References

Appelbaum, Eileen, Bailey, T., Berg, P. and Kalleberg, A.. 2000. Manufacturing advantage: Why high-performance work systems pay off. Ithaca, NY: Cornell, University Press.

Australian Employee Ownership Association (AEOA), Australian Institute of Company Directors (AICD), Australian Shareholders Association (ASA), 2007, Employee share ownership plan guidelines.

Bartkus, B.R., 1997, Employee ownership as a catalyst of organizational change. Journal of organizational change management, 10(4).

Becker, Brian, Huselid M., and Ulrich,U. 2001. The HR scorecard: Linking people, strategy, and performance. Boston: Harvard business school press.

Christophe E., Lakshman, C. and Pesme, J.O.,2011, Profit sharing in the nineteenth century: history of a controversial remuneration system,    Social responsibility journal, 7 ( 1)41.

Dunkle, D. S., Cabaniss, E., Johnston, Gardner, Dumas, 2010. The ESOP advantage. O’Neal LLP, 205, 716-5395.

Gates, G., 1998. The ownership solution: toward a shared capitalism for the twenty-first century. London, Penguin Press.

Guedri, Z. and Hollandts, X., 2008. Beyond dichotomy: the curvilinear impact of employee ownership on firm performance, Corporate Governance, 16(5), 460-473.

Kaewpradab, J., 2006. The Relationship between job satisfaction and the organizational commitment of employees. Thesis (MBA). Huacheaw Chalermprakiert University. 

Kruse, D., Freeman, R., Blasi, J., Buchele, R., Scharf, A., Rodgers, A., and Mackin, C., 2003, Motivating employee-Owners in ESOP Firms: human resource policies and company performance, NBER working paper.

Ramkumar V. -Designing a successful ESOP program [online] Available from https://cedar-consulting.com/insights/designing_a_successful_esop_program.html [Accessed on 16.04.2023].

Ross, T.L. and Collins, D., 1987, Employee involvement and the perils of democracy: are management’s fears warranted?” National productivity review, 6 No. 4, 348-59.

Weisbord, M.R., 1988. Towards a new practice theory of OD: notes on snap shooting and moviemaking. Research in organizational change and development, 2, 59-96.