Employee Share Option Schemes | The Next Big Thing In Management
Employee Share Option Schemes | The Next Big Thing In Management
The next big ‘thing’ is more often than not an old fashioned and tried and tested ‘thing’ with a shiny new layer of gloss and some lessons learnt thrown in to the pot. The same applies in management and in my view, the coming business year will see a greater focus on employee incentivisation, specifically how giving executives and/or employees some sort of shares in a company can be the key to unlocking your business’s potential. What greater way to motivate each and every staff member than by giving them all a little piece of the pie?
Employees share option schemes (ESOPs), pension plans (such as the USA’s 401k) or Enterprise Management Incentive Schemes (UK) are common in publicly traded companies across the globe. Share price data is publicly available information and those shares are therefore tangible and easy to buy and sell. Equivalent schemes in private companies are less widespread however a practical program for the business with a notional trading platform and ‘shares’ for staff is certainly implementable.
The economic challenges we are all facing compound the view that current incentives are inappropriate and can lead to problems triggered by a lack of short, medium or long term accountability for corporate decision making. Bonuses are generated by short term deliverables which may not be in the best interest of the company and a logical replacement to this practice is a more long term, golden handcuff arrangement. Share schemes are a safe and fair way to motivate staff whilst ensuring their goals are entirely aligned with those of the whole company.
The USA has typically led the way for such private share schemes, typically known as phantom stock options or stock appreciation rights (SARs). One of the founding fathers of such practice was UPS, founded in 1907. Until its listing on the stock exchange in 1999, the company was broadly owned by non management, management and supervisory personnel – a practice established by Jim Casey in the 1920s when he gave staff the opportunity to purchase company shares. UPS regularly ran a stock purchasing program before the IPO where staff could trade shares. In January 1997 the price was set at $29.25 and by March 1999 it had risen to $47.
In November 1999, the Company offered 10% of its stock to the public for the first time and on the first day of trading, the stock closed at $67.25. Not only did employees benefit until 1999 with the phantom scheme but with the IPO, they had a second and larger windfall with an even more liquid platform on which they could trade their shares. Hard work and loyalty were repaid twice over.
Why should you offer shares to your staff? It motivates employees, improves firm performance, fosters innovation and promotes sound financial health. It promotes staff loyalty and attracts and retains a high caliber of staff who want to have a vested interest in their future. To give staff the status of part owner of a business is a very powerful motivator.
There is of course a cost in implementing such schemes because you will undoubtedly need advice from specialists. There are accounting and tax issues at play here and it is critical to ensure that the framework you build takes into account local tax issues, accounting implications for your balance sheet and other miscellaneous issues such as ensuring that you allocate enough stock to a trust so that future employees can benefit, ensuring the vesting period is appropriate. Yes they cost money but perhaps the money spent on rolling one of these out would be made back, and several times over, by an all round improved performance by staff.
OnSite Consulting is a nationwide hospitality and consulting company to the casino, hotel & restaurant market. Providing immediate solutions for sites seeking turnaround, insolvency and concept repositioning. www.onsiteconsulting.com
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