The main benefits of offering shares or options to employees are:
What's the deal with employee share and option programs (ESOP)?
Some might say it's to set your business up for success. "Why?", you might say. Well, if you structure an ESOP program correctly, there's no better way to attract, motivate and retain great talent - while saving your company valuable capital. Find out more in the rest of this blog post.
Employee Stock Ownership Plan, often referred to as ESOP, is an employee stock ownership plan that over time gives employees ownership shares in the company
These can take many forms, including restricted stock awards, stock options, restricted stock units and others. They have different advantages and disadvantages for different stages in a company. We will discuss this in more detail in separate blog posts.
One of the most important jobs of any CEO is to recruit, motivate and retain talented people. And carefully considered equity compensation plans (ESOPs) can have a powerful impact in all these areas.
With the current struggle for labor, it's harder than ever to recruit skilled people for your business. Skilled labor is a scarce resource and in a booming economy, many companies are fishing in the same pond. That's why it's important to stand out and create attractive compensation schemes.
ESOP has an attractive effect for workers since it can be both highly financially rewarding, but also due to the fact that it has motivational side effects that appeal to many workers. More on this below
Workers' loyalties, mentalities and aspirations have changed over time. The younger generation is more interested in working on something that is meaningful to them. Many workers have explained that co-ownership helps to contribute to this. Therefore, they may find equity compensation packages more attractive.
Co-ownership also creates a solid team culture, or an "us" culture, which often strengthens the team and increases employee motivation and contribution. This also makes people more tolerant of the hard work and tough times that many early-stage companies often go through. This leads us to the retention effect of share-based remuneration schemes.
You've probably heard it before, so it may sound like a cliché that a company's most valuable asset is its employees. But if you've ever been in a company where the team culture is souring or many key people are leaving; you'll know this to be true.
If employees are part of an ESOP program, it often makes them less opportunistic in tough times as mentioned above. Compared to the same situation where employees without ownership may be more inclined to look for alternatives faster.
This employee "stickiness" is partly linked to both the psychology of being "invested" in something, the feeling of being on a goal, strong team culture, and in some cases the vesting conditions (vesting period) associated with the ESOP program. We will cover more on this in more detail later. ESOP programs therefore often have a strong retention effect on employees.
Other than the important effect of attracting, motivating and retaining talent, ESOP programs have; cost savings is another important effect of implementing it in your company.
Most companies that actively use ESOP as a tool use it as part of their overall compensation package. For many companies, this can have a strong impact on their finances as salaries are usually the biggest cost.
In some companies, especially early-stage companies, it is necessary to have lower salary levels for a period of time. Share-based pay is often used as a tool to compensate for this. We will cover more about this in a separate blog post.
This is something early-stage investors find beneficial and even expected. Both because it is good for the company's finances, but also because the team has "skin in the game" and demonstrates commitment and belief in the company by exchanging safe money for potential upside.
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