It seems every small business owner I speak to lately is struggling with the same thing. The compound effect of lockdowns, border closures, the ‘Great Resignation’, the gig economy, rising wages and flexible work arrangements is making attracting and retaining good people tough.
At our own firm, where we focus on succession planning for privately-owned businesses, we often hear of job candidates we’re considering being offered sign-on bonuses and salary bumps to sweeten the deal elsewhere.
Fortunately, there are alternatives. In my experience working with SMEs – and at our own firm – offering employees the opportunity to own equity in the business through an employee share scheme (ESS) can be a real differentiator.
Also known as Employee Share Ownership Plans (ESOP), ESSs are a legal arrangement set up by businesses, small and large, where employees can receive not just income but capital gains and other potential benefits of owning shares.
Different businesses have different reasons for introducing an ESS, for example:
- Employees can benefit from both capital growth and income by holding equity in the firm they work for. ESOPs also come with generous tax concessions.
- The business can provide a different type of remuneration (non-cash) to attract, retain and motivate staff.
- The firm’s owner or founder can use them as an effective employee buy-out instrument when they are ready to exit the business. And if retiring, ESOPs can give them the ability to extract cash by selling shares to employees.
When it comes to the first two points – attracting and retaining staff – here’s how we’ve made an ESS work for our staff.
Case study: Succession Plus’s ESOP
Staff at Succession Plus are invited to join our ESOP after 12 months of service, which is typical when offering a plan. We offer a profit share plan where a percentage of our profit over a set benchmark is paid into the plan each year and is used to acquire shares for our employees. That means an employee’s ability to join the plan is not dependent on their financial position – they don’t have to personally contribute money to the plan.
The ESOP was introduced and rolled out gradually. We’ve found it is far better for employees to acquire two per cent per annum for five years than 10 per cent upfront as it allows for a smoother transition into the ownership mindset, or what it means to think and act like an owner.
We’ve also found that dedicating time to hosting employee workshops about ownership, both the technical, legal, financial and tax implications, has made a real difference.
As a result of owning shares, we have observed that our people are more engaged and interested in the company’s performance, growth and longer-term strategy. They contribute more ideas and suggestions and think and act like business owners.
We also believe it has helped us retain good people long-term, and this makes good economic sense for the business. On average, the cost to replace one employee is approximately 45 per cent of their salary, so a $100,000 salaried employee costs about $45,000 to recruit, onboard and train.
In summary, we’ve found that our ESOP has been a significant differentiator in both attracting and retaining staff. An equity component often makes a difference to the employee’s decision.
