October 2020

Employee Share and Option Plans – Creative Business Solutions during Covid-19

In response to COVID-19, employers have been forced to cut costs and for many, this has involved reducing the hours and salaries of valued employees or terminating staff.

With most of Australia still subject to some form of restriction and COVID-19 cases escalating worldwide, there is uncertainty about the future economic climate. Consequently, many employers have been unable to increase the hours and salaries of employees back to ‘pre-COVID’ levels and have had to defer planned pay rises and promotions.

In this context, employers should consider how they can incentivise and motivate their employees without impacting cashflows. If that is the case for you, then an employee share and option plan might be the perfect solution.

An employee share and option plan (known as an ESOP) is a remuneration scheme that can result in employees owning an interest in a corporate employer. Under an ESOP, employees can be issued shares, or options to acquire shares, in their corporate employer if they meet agreed targets or conditions which are tailormade and designed to achieve the business’s short and long-term objectives.

In addition to motivating employees to achieve agreed targets or conditions, offering ownership interests to key employees can counterbalance any reservations they have from being asked to take a salary reduction or defer an agreed pay rise, whilst also being asked to take on more or different responsibilities. However, there are also plenty of other reasons why you should consider implementing an ESOP as part of your business strategy. These include:

  • creating a reason for an employee to stay with the business, rather than moving on to join a competitor with deeper pockets;

  • developing a sense of ownership in employees, with a view of them taking on more responsibility for key tasks, generating new ideas to improve the business, and making better decisions for the longer-term success of the business;

  • having something to offer (other than cash) to new talent to attract them to the business; and

  • the fact that the perceived value of any shares you issue now as part of an ESOP may be much higher than their actual value due to current temporary market factors.

While COVID-19 might be the trigger for you to set up an ESOP, it is important to understand that the true value of an ESOP is one that is only fully realised over time. In other words, the issue of shares under an ESOP should not be considered a reward for past performance or a peace offering for foregone remuneration – in reality, an ESOP should stand as a pillar to motivate employees at all levels to improve the business. Therefore, employers need to think carefully about the structure of their ESOPs and what they want to achieve from it, and to get advice and guidance from their legal and financial advisors to ensure that their ESOP is properly designed and tailored to realise their vision.

If you think that your business can benefit from having an ESOP in place, please get in touch with us if you want to learn more about how an ESOP can benefit your business.

Authors: Eric Kwan & Claire Perry