By Craig West, Executive Chairman of the SME Association of Australia and CEO of Succession Plus (successionplus.com.au)
It’s no surprise that hardworking employees are an essential part of any well-functioning business. That’s because staff who are ‘switched-on’ provide businesses with an enormous potential to increase efficiency, deliver value, and ultimately, drive profit. What is surprising, however, is that few business owners have plans in place to effectively retain their key employees.
In today’s market, the ability to attract, retain and motivate people to peak performance means being able to attract and retain business. Having an effective retention strategy is a major source of competitive advantage and can ultimately mean the difference between success and failure.
Ask yourself, what incentives do I offer for high-performers?
Usual responses are likely to include above-average wages, staff awards or commissions. Some employers may pay and an end-of-year bonus whereas others may invite their staff into a frequent flyer program.
Careful analysis of these usual responses, however, reveals that these forms of incentives are short-term and really don’t do much to change the culture of a business. In fact, some would argue that these incentives soon become expected by employees simply as a matter of experience – ‘I received a bonus for the last two years, so I should get one this year’ or ‘End of financial year means a pay rise’.
Now ask, what would it mean if your employees were as committed to achieving success as you are?
While short-term incentives are certainly encouraged, they should really be used to supplement a strategic, long-term incentive plan. In this regard, acknowledging the valuable contributions of your staff by way of a long-term incentive can be achieved through the implementation of an Employee Share Ownership Plan (ESOP).
An ESOP allows employees to own a part of the company they work for, by proving employees with shares or certain other interests in the relation to their employment. The express intention is that employees will think and act like business owners and see the business with a new perspective.
The benefits of implementing an ESOP, for both the employer and employee can be considerable. In fact, research overwhelming shows that ESOP companies have improved performance, higher profit and better staff retention compared to non-ESOP companies. Other benefits include:
Supports employee development
Rewards employees who make a substantial contribution to the business
Gives the company a competitive advantage in recruiting, motivating and retaining staff
Assists employees to achieve their financial and lifestyle goals
ESOPs also improve the overall attractiveness and value of the business. For example, in a sale situation an ESOP is also a clear demonstrator of the company’s performance and the health of its financial assets since it shows the company’s ability to pay funds over a period of time based on performance targets being achieved.
In designing an ESOP the objective is to create a structure with which employee’s lifestyle and financial goals are aligned with the business. The result? A cohesive and committed team that is single-minded about working toward and sharing the benefits of a successful and profitable business.
Traditionally, ESOP’s have been fairly common with larger corporate firms, but have also been successfully adapted to smaller companies who are beginning to realise their unique benefits. For example, my business, Succession Plus, has developed an ESOP model specifically tailored towards SME’s called the Peak Performance Trust.
ESOPs can be structured in a number of ways. For example, under the Peak Performance Trust model, increased profits are directly linked to performance payments made into trust on behalf of employees. The trust then uses these payments to purchase shares in the employer, thereby building an employee’s stake in the business. In this way, it gives employees the opportunity to part own a business while enjoying the security and lifestyle that comes with being an employee. While the ultimate value held by employees will be derived from shares acquired by the trust, in many cases employees will also be entitled to receive annual dividends, the perfect example of a short-term supplement.
The potential of ESOPs for SMEs has also been recognised by the government. As part of the government’s Industry Innovation and Competitiveness Agenda major changes have been in the area of ESOPs. New legislation has been introduced to simplify Employee Share Schemes and to remove certain tax obligations that have otherwise discouraged their introduction. In introducing the changes, Minister for Small Business, Bruce Billson said, “we have designed these changes to increase the international competitiveness of our tax system and allow innovative Australian firms to attract and retain high-quality employee in the globally competitive labour market” (Media Release 15 Jan 2015, Employee Share Schemes Unleashing Enterprise).
These new changes should be welcomed as they make employee share plans more attractive and accessible for small businesses, allowing them to stimulate growth, benefit from employee engagement and become more competitive within their respective market.
It is clear that an ESOP, unlike any other type of employee incentive tool, truly ties the employee’s financial and lifestyle goals to the performance of the company. It is the ultimate ‘golden handcuff’ for your high- performing staff and I highly recommend finding out if an ESOP could be right for your business.