The advantages and disadvantages of employee share ownership for a company and an employee

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by Employee Share Ownership on February 27, 2012

Employee Share Ownership in Australia
The basic proposition is simplicity itself: people work better if they are working for themselves. Hence businesses that are owned by those who work in them are more likely to be successful than those owned by outsiders.

THE COMPANY
Advantages to Companies of establishing Employee Share Ownership
The key advantages of establishing an Employee Share Ownership Plan (ESOP) are:

    • Align employees’ interests with those of shareholders;
    • Recruit or retain key employees;
    • Compensate for lower salaries and relieve pressure on cash flow;
    • Lower the supervision required of employees;
    • Increase innovation;
    • Increase customer loyalty;
    • Increase shareholder value;
    • Motivate employees to become more productive;
    • Improve the communication between employee and managers and increase cooperation;
    • Increase loyalty and reduce staff turnover;
    • Increase employee job satisfaction;
    • Increase the Company’s likelihood of survival;
    • Realise owner’s investment[1]

Disadvantages to Companies of establishing Employee Share Ownership
There can be some disadvantages:

      • Where the share price of the company’s shares does not increase and the employee feels they have no control over the share price outcome, then it can affect morale and retention;
      • There are costs associated with establishment and administration of the ESOP;
      • Share Ownership, specifically option plans can be dilutive – i.e as more shares are issued each share you own becomes a smaller percentage of the company.

THE EMPLOYEE
Benefits for Employees
Benefits to employees can include:

      • Financial rewards, linked to individual and organisational performance or a long term savings and ownership structure;
      • An increased sense of ‘ownership’ and association with the enterprise;
      • Improved awareness about the ‘big picture’ decisions; directions and corporate plans of the enterprise;
      • There is a better partnership and communication between management and their employees;
      • ESOPs are often linked with employee engagement and involvement and this presents the opportunity to influence decisions about products and process.

Risks for Employees
Sometimes ESOPs can go wrong (if they are not properly structured) and some of the potential risks are:

      • The employee has all their eggs in one basket. Essentially the employee is over exposed to the company’s shares, so if the company does not perform or worse goes into administration the employees investment is lost (this problem can be minimised by limiting the amount of salary or shares that the employee can buy);
      • The share price can decrease and this can impact the value of the holding for an employee;
      • The employee does not feel they can influence the share price or performance measures and as a result the plan has no value for them.

If you want to find out more about how employee share ownership or an ESOP can help your organisation, call 0424 557 297, become a member or attend one of our training sessions.

[1]. See UK, Robert Postlethwaite, Johnathan Michie, Patrick Burns, Graeme Nuttal Shared Company, October 2005 and US, Steven F. Freeman, University of Pennsylvania, Effects of ESOP Adoption & Employee Ownership: Thirty years of Research and Experience (2007)

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