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admin
631 Posts |
 Posted - 30 Dec 2006 : 08:14:59
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It has become clear from the most common search words being used to refer people to our web-site that many are looking for more information on “Setting up an ESOP”.
This discussion forum has therefore been created to provide community input on the topic, primarily as an educational resource for budding ESOP developers.
There are several checklists, diagnostic tools and guidebooks available on implementing ESOPs. The most comprehensive guidebook – called “Employee Share Plans: Getting Started” - is available for free from the Employee Share Ownership Development Unit of the Australian Department of Employment and Workplace Relations (DEWR). This “Kit” (as it is referred to) concentrates on “qualifying share plans” (those that qualify for income tax concessions to employees participating in the plan) under Division 13A of the Income Tax Assessment Act (ITAA) and is aimed at assisting businesses to ‘get started’ on the road to developing a "qualifying" ESOP. It includes guiding businesses through the initial decisions about what is most suitable to their businesses, including providing an overview of the types of employee financial participation schemes that businesses can implement, and more in-depth information on legal requirements, structure and taxation matters. Much of this material is also available in summarised form on-line at (from where the kit can also be ordered):
THIS KIT IS NOW UNAVAILABLE AND IS NOT BEING REPRINTED
There are also guides specifically for both employers and employees available on this web-site, as follows:
THIS WEB-SITE HAS BEEN CLOSED BY THE FEDERAL GOVERNMENT. YOU CAN SEE SOME OF THE PAGES BELOW RE-PRODUCED AS POSTS IN AUGUST, 2010
Employee share ownership plan tax considerations - a guide for employers
http://www.workplace.gov.au/workplace/Programmes/ESO/Employeeshareownershipplantaxconsiderations-aguideforemployers.htm
Planning and developing an employee share ownership plan - a guide for employers
http://www.workplace.gov.au/workplace/Programmes/ESO/Planninganddevelopinganemployeeshareownershipplan-aguideforemployers.htm
Considering your employee share ownership plan offer - a guide for employees
http://www.workplace.gov.au/workplace/Programmes/ESO/Consideringyouremployeeshareownershipplanoffer-aguideforemployees.htm
Making the most of your employee share ownership plan - communicating with your employees (REPRODUCED ON THE "COMMUNICATING YOUR ESOP" FORUM.)
http://www.workplace.gov.au/workplace/Programmes/ESO/Makingthemostofyouremployeeshareownershipplan-communicatingwithyouremployees.htm
Frequently asked ESO questions by employers
http://www.workplace.gov.au/workplace/Programmes/ESO/FrequentlyaskedESOquestionsbyemployers.htm
Frequently asked ESO questions by employees
http://www.workplace.gov.au/workplace/Programmes/ESO/FrequentlyaskedESOquestionsbyemployees.htm
Most of the tools available however focus on issues of a ‘technical’ and ‘mechanical’ nature – how things might operate, particularly in relation to structures and associated legal and tax questions.
There is little available on what might be called “philosophical” issues – for example, you may need to take a good look at your organisation’s culture. Is it ready for – and are the people capable of – making the changes that might be needed to accommodate the introduction of an ESOP?
This latter issue might require you to do some research work back in your workplace. The more people from whom you can gather information and opinions the better. The most valuable input will come from your ‘stakeholders’.
ESOP Consultants are now starting to offer “ownership culture surveys” etc (see the discussion forum on “ESOPs and Ownership Culture” elsewhere on this web-site) to assist with the introduction of an ESOP – it is no good introducing an ESOP into an already dysfunctional workplace, you will only end up with a dysfunctional ESOP! To be truly effective, ESOPs need to be tailored to suit the unique culture of the particular organisation in which they will be implemented. Also, as we have learned, ESOPs are more likely to succeed when they are part of a larger program of organisational reform.
The Australian Employee Ownership Association (AEOA) will continue its efforts to promote the philosophy and technology of ESOPs. The best advocates are, of course, those companies with plans who willingly communicate the benefits they have realised to other interested groups and individuals. It is important to know that ESOPs can be as equally effective in the global corporation whose products are household names as in the locally-owned private enterprise.
In our quest for international competitiveness, both employer and employee groups in Australia continue to seek better ways of improving work, making decisions and doing business. We are beginning to see the results: better jobs, safer workplaces, more effective communication, higher quality goods and services and improved productivity. It makes good sense to supplement this with a feeling of ownership in the business. There is success in sharing.
Hopefully, what you learn from this discussion forum will leave you better equipped to proceed with the installation of an ESOP in your company. We do recommend that you seek professional help on the design and implementation of the plan. The AEOA would be happy to provide more information and, if appropriate, refer you to others for expert advice.
Remember, the following is what all the reference material advises:
• Do your ‘homework’ well: proceed slowly and carefully
• Speak with (and listen to) all who are likely to be affected by changes
• Learn from the experience of others
• And if you need help, don’t be afraid to ask for professional advice!
The Moderator
AEOA Discussion Forum.
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Alan
87 Posts |
Posted - 30 Dec 2006 : 08:36:18
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Why Bother?
When first considering an ESOP, some employers ask “why bother?”
In the case of a listed company (where shares are traded on the stock exchange), why not simply leave it up to the employee’s initiative to acquire the shares of his or her employer on the open market like any other investor?
There are many reasons why this doesn’t happen – but there is also the fact that many employees, even if they may be interested, know little about the process of purchasing shares. An opportunity of buying shares in one’s own organisation through an employee share purchase plan may appear a far more attractive option to the ‘ordinary employee’ than purchasing shares on the open market. Furthermore, if shares can be purchased in small, manageable parcels, often with the company’s assistance, much of the mystery surrounding buying shares may disappear.
Many ESOPs have built into them a facility which allows the employee to pay off the cost of their shares (eg: through an advance, a company-funded loan, or some other method). This means that the immediate financial burden is substantially reduced. Other plans may be structured so that the employee’s purchase is financed out of part of the company’s annual profits – an attractive option in that the employee is not required to provide any cash funds.
In the case of unlisted companies, ESOPs can create a private market for unlisted shares. They can also provide a low cost source of finance which is controlled by individuals who have the most knowledge and commitment to the enterprise (ie: they create “relationship investors”). ESOPs can also create a buyer for active business owners seeking retirement, and/or passive investors seeking liquidity, and by this means protect the long term future of the enterprise. In smaller firms, they have also been known to preserve employment in firms which require new investment and attract and retain key employees.
Additional advantages/benefits from implementing an ESOP which can be also be considered, include:
1. They provide additional short and long-term financial rewards for employees (usually at low cost to the company, and linked to the rewards obtained by investors), allowing the additional benefits to continue after the employee’s retirement and/or death for the benefit of spouses and children.
2. They provide employees with the same information, voting and other rights as the owners of the business, resulting in improved communications, participation in corporate governance, job satisfaction and productivity.
On this latter issue, the major factor in the 21st century which is driving ESOP take-up rates is that the very culture of our business organisations is changing to more accurately reflect the demands of a new, different workforce. More often now, employees are being seen as partners in the enterprise and - in a growing number of cases - they are being given a share of the profits through employee share ownership. ESOPs provide an important step in the move towards more participative decision-making in Australian companies. Through involving employees at all levels of the organisation in decisions about everyday operational issues – even in corporate strategic planning issues - many Australian businesses have realised dramatic improvements in productivity, profitability, communications and morale.
The technology of ESOPs can also be used to introduce ownership relationships with other business stakeholders such as customers, suppliers and the community to provide additional operating advantages and social support for productive activities in the economy.
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Edited by - Alan on 30 Dec 2006 08:37:07 |
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Alan
87 Posts |
Posted - 30 Dec 2006 : 08:39:18
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Who are the Stakeholders in Your ESOP?
The term ‘stakeholder’ is often used to describe individuals or organisations who are likely to be affected by a decision (ie: they have a ‘stake’ in what happens). There are some ‘costs’ involved. The stakeholders viewpoint will therefore be a critical issue in the process of implementing an ESOP.
You will need to consult with stakeholders to maximise your chances of making an informed decision. Each of the affected groups will need to be contacted and their concerns about the ‘ESOP intention’ recorded. Those who will be affected by any decision to implement an ESOP will be:
1. The existing shareholders – they need to be acquainted with the potential effect of an ESOP on both the performance of the enterprise and the value of their shareholding (see further comments below);
2. The employers – they will be seeking information about the different ways an ESOP can impact on such performance indicators as overall productivity, employee morale and the start-up and running costs of the scheme. They will need to make decisions about the mechanics of how the ESOP will operate and be administered;
3. The employees – they will want to know about the immediate and long-term advantages and disadvantages of participating in ownership of the organisation.
4. The trade unions involved – our unions, separately and through the Australian Council of Trade Unions (ACTU) represent the interests of employees in this country. Trade unions will have reservations about ESOPs that are perceived to be a replacement for any part of the existing wages, working conditions, benefits or rights of employees. It is critical that ESOPs, while an important part of rewarding employees, are seen to be operating in addition to any of the organisations existing remuneration systems.
5. Network participants - other stakeholders will include individuals and organisations who may be indirectly affected by the organisation’s performance. Customers or clients, of course, are the most important of these. Others may be your suppliers, your financiers (such as bankers or creditors) or other companies with whom you have network arrangements (eg: joint buying, selling or distribution arrangements).
After the company and its employees, the party most likely to be affected by the decision to install an ESOP, will be the shareholders. In deciding to provide a method whereby employees can buy (or be allocated) shares through an ESOP, the company will need to make a decision about whether the shares are to be new or existing shares.
If they are new shares, such an approach will contribute to funding company growth through the ESOP and allow the company to reduce its borrowings by replacing them with equity. They will reduce the ownership proportion of existing shareholders – this is described as ‘diluting’ their equity. Shareholders need to consider whether this concern will be outweighed by the advantage of having some of the employees in their company as ‘part owners’, and having additional capital subscribed for at near market rates by employees.
Should the company decide that their ESOP will be based upon the purchase of existing shares through outside finance, the problem of dilution of shareholding is avoided.
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Edited by - Alan on 31 Dec 2006 05:46:34 |
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Alan
87 Posts |
Posted - 30 Dec 2006 : 09:11:08
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The Costs of ESOPs to Employers
There are many different kinds of ESOPs operating around the world.
ESOPs in Australia tend to fall into the following four categories:
1. Partly paid share plans
2. Fully paid share plans
3. Option plans
4. Replicator share plans (ie: shadow/phantom share plans)
The "Fully Paid Share Plans" come in three varieties - financed by loans to employees (Loan Plans), financed by employee contributions (Savings Plans) or financed by company contibutions (Employer Funded Plans).
Not all plans operate in the same way. The advantages and disadvantages of each need to be considered on their own merits. One of the great advantages of ESOPs is that they are flexible and can be tailor-made to suit the needs of the organisation.
There are direct costs associated with the initial implementation of the plan to the employer – things like legal fees, preparation and submission costs, consulting fees and printing. There are also indirect costs tied up in such things as travel costs of those communicating the plan, the wages of the communicators, time off the job for employees attending meetings etc.
There will also be the ongoing administration costs to the employer, as well as the need to find the funds necessary to provide loans to employees, or purchase shares on their behalf.
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Edited by - Alan on 31 Dec 2006 05:41:48 |
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Alan
87 Posts |
Posted - 30 Dec 2006 : 09:12:50
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Considering the Cost to Employees
How the purchase of shares is funded depends on the type of plan in use. Until recently, the plans that were most favoured in Australia were those that offered ‘options’ to purchase shares (to be exercised on payment in full at a later date) or those where the employer provides a nil or low-cost loan to the employee. In both cases, the employee is required to invest little or no 'up-front' cash. Another popular plan type funds the purchase of shares from a portion of company profit – once again not requiring any cash from the employee.
As with any investment in the sharemarket, there is always some risk or ‘downside’ – for example, if the value of the shares drops below what the shareholder originally paid for them. This can be particularly hard on the shareholder who borrowed money to purchase shares at a particular price, and is still bound to repay that amount, even though the shares are worth less.
These days, because most employees hold their shares for a number of years (apart from exceptional circumstances), such risks are generally outweighed by a combination of the advantages that flow from such benefits as options, loans, dividends and increases in share prices.
There are some ESOPs in Australia that do require employees to contribute cash ‘up-front’ to acquire shares. In some cases, this can be a deterrent to employees and could have an effect upon the participation rate in the ESOP.
Whether the shares acquired are ”qualifying shares” under Division 13A of the ITAA also needs to be considered as certain, minor income tax concessions are available to employees receiving shares from their employer as a form of reward or remuneration.
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Edited by - Alan on 31 Dec 2006 05:51:06 |
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Alan
87 Posts |
Posted - 30 Dec 2006 : 09:15:26
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Before Going Ahead
Here are some of the important questions which must be answered before making the decision to go ahead and introduce any kind of ESOP.
1. Participation
(i) Which staff members will be invited to join the company’s Employee Share Ownership Plan (ESOP)? Will it be just for management, for a restricted number of employees, or for all staff?
(ii) If the plan is not intended for all employees, are other reward systems currently in place? If not, how will ineligible employees respond to the ESOP being available to a select group?
2. Financial Risk
(i) To employees – to what extent does the plan you are considering expose the employee to personal financial risk? (eg: what would happen if the share market dropped, the company fails, etc?)
(ii) To shareholders – to what extent will the plan make management and the employees a “control group” which could disadvantage shareholders?
(iii) To the employer – what lending/funding arrangements, if any, will the company be committing itself to? From what source will these loans/funds be drawn? In small companies, does this adversely affect liquidity or will it create a new source of low cost finance? Are you committed to buying back the shares at short notice?
3. Flexibility
(i) How attractive is the share offer to employees? Are there obvious advantages to the employee/shareholder? (eg: discounted shares, one-to-one offers, employer-funded plans). Is the size of the share parcels realistic and affordable? Is a significant up-front cash investment required of the employee (in a share purchase plan)? Are loan repayments spread over an appropriate period (in a loan plan)?
(ii) How can the ‘non-employee’ shareholders protect their investment?
4. Distribution of Shares and Benefits
(i) Is the plan designed to provide all employees equal access to the distribution of shares, or will management (or others) be given preferential treatment?
(ii) Who has the power to dispose of the shares acquired?
(iii) How are the shares sold?
(iv) How is the share price determined for unlisted companies – who has the power to appoint the values/specify the basis upon which the valuation is carried out? Who has what discretions when interpreting the value?
(v) Must the shares be sold back to specified parties?
(vi) What are the conditions for getting shares transferred (‘vested’) in the employee’s name?
5. Link to Organisational Performance
Does the plan clearly communicate the importance of the link between jointly working towards the achievement of corporate objectives and being an employee/shareholder?
6. Consultation
(i) Have the stakeholders most likely to be affected by the introduction of a plan (shareholders, employers, employees, unions etc) been adequately consulted?
(ii) Has a cost-benefit analysis been prepared for presentation to shareholders to obtain their approval?
7. Ease of Explanation
Is the explanatory material easy to follow and simple to explain to potential employee shareholders? (Many employees will not be familiar with stock market terms such as Capital Gains Tax, Franked and Unfranked Dividends, Dividend Reinvestment Plans etc.).
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Edited by - Alan on 31 Dec 2006 05:54:13 |
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Alan
87 Posts |
Posted - 30 Dec 2006 : 09:20:13
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Communicating and Administering an ESOP
The ongoing success of an ESOP will have as much to do with effective communication as with good administration. It is also important to realise that a well designed plan doesn’t just happen overnight. In planning a time-frame for the development and implementation of a plan, allow that it maybe as short as fifteen weeks or as long as twelve months. The following flow chart outlines the steps that must be taken. As you proceed, communication about progress should be frequent and simple to understand.
1. Management review and strategy development >>>
2. ‘In principle’ agreement from Board of Directors >>>
3. Preliminary design stage (which includes) review of current position and preparation of reports >>>
4. Obtaining agreement in principle from employees >>>
5. Detailed plan design stage >>>
6. Approval of Board of Directors >>>
7. Approval of employees >>>
8. Documentation – with full operating details (These must be legally correct)>>>
9. Shareholder approval at General Meeting >>>
10. Compliance with relevant requirements of the Stock Exchange, the Australian Tax Office and the Australian Investments and Securities Commission >>>
11. Implementation Stage – this includes the preparation of and distribution of communication materials and establishment of necessary operating procedures.
(See the discussion forum on “Communicating employee share plans” elsewhere on this web-site for further information on the last step).
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Edited by - Alan on 30 Dec 2006 09:22:01 |
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Alan
87 Posts |
Posted - 30 Dec 2006 : 09:25:19
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Steps in Implementing the Plan
The following indicates some of the essential steps in implementing a share plan and an estimate of the time required. The time will vary depending upon the size of the organisation, its particular design requirements and the relative complexity of the plan.
1. Preliminary design - Steps to be taken include: Review company’s performance, consult with stakeholders and prepare a report for management. Estimated time is two weeks for this task
2. Detailed design - Steps to be taken include: Formulate final plan design, prepare report for management, confirm detailed plan outline and obtain Directors approval. Estimated time - 3 weeks
3. Documentation - Steps to be taken include: Liaise with company solicitors on plan documentation such as Articles of Association, Prospectus (if required) and Notices of Meetings. Estimated time 4 – 8 weeks
4. Approvals: From the Aust Stock Exchange about 2 weeks, from ASIC about 2 weeks, from ATO (time varies) and from shareholders - 4 weeks or more
5. Communication/Administration/Implementation - Steps to be taken include: Presentations/Booklets, Recording systems and procedures and appointing personnel. This will take from 4 to 12 weeks.
The total "timetable range" is 21 – 33 weeks
(From: “Understanding ESOPs” Education Pack, AEOA, 1995 )
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Alan
87 Posts |
Posted - 30 Dec 2006 : 09:27:49
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Potential Benefits to Employers and Employees
Here is a simple summary of some of the benefits to employers and employees of introducing an ESOP. Are there some benefits that you had not considered that could be promoted in your organisation? Are there others that you might add to the list?
THE EMPLOYER
Benefits may include:
• A new source of low cost funds to grow the business;
• Directors becoming accountable to ‘employees as owners’
• Improved productivity and performance;
• A workforce which is better informed of the enterprise’s activities and able to share in an owner’s perspective;
• A more motivated and committed workforce: better general morale;
• A more service-oriented and client-focused workforce;
• Less industrial unrest and conflict;
• Improved flow of creative, innovative ideas and mutually beneficial changes to the way the enterprise does things;
• Reduced employee downtime costs ( a healthier workplace, fewer sick days, lower absenteeism, etc.).
THE EMPLOYEE
Benefits may include:
• Increased financial rewards, linked to individual and organisational performance;
• A long-term savings plan with minimal investment;
• An increased sense of ‘ownership’ of the enterprise;
• Improved awareness about the ‘big picture’ decisions; directions and corporate plans of the enterprise;
• Management more accountable to employees and concerned with their views;
• Opportunity to influence decisions about products and process;
• Improved communications between management and employees.
(From: “Understanding ESOPs” Education Pack, AEOA, 1995 )
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admin
631 Posts |
Posted - 02 Jan 2007 : 11:56:05
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“Why Employee Ownership?”
Overall the motives for implementing employee ownership plans can be grouped into six main categories.
• Employee share ownership plans may be implemented in the hope of improving organisational performance.
• There may be direct financial advantages, either through tax advantages or as a source of capital or both.
• The plan can serve as an important employee benefit or as a vehicle to provide retirement income.
• Employee owned companies can be used to preserve employment (through buyouts of firms in distress), or to create employment (through new starts).
• They may be used as a vehicle to transfer ownership if the current owner is interested in selling up.
• There may be philosophical or ideological reasons.
There is an enormous variation in the types of employee-owned enterprises. For convenience, they have been classified into three general categories, according to the degree of ownership.
1. Partially employee owned: those firms which have some employee share ownership but do not meet the criteria set out in 2 and 3 below.
2. Majority employee owned: those firms where the majority of the voting shares are owned by the employees and a majority of the employees participate in the employee share plan.
3. Complete employee ownership: those firms where the employees hold all the voting shares in the enterprise.”
(Richard J. Long quoted in Equity Report ,Vol 1, No.1, AEOA, 1992).
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admin
631 Posts |
Posted - 04 Jan 2007 : 05:28:01
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Types of Employee Share Plans
The acquisition of shares by employees can cover such schemes as:
1. Fully paid share plans
2. Option plans
3. Partly paid share plans
4. Replicator share plans (ie: shadow/phantom share plans)
The "Fully Paid Share Plans" come in three varieties - financed by loans to employees (Loan Plans), financed by employee contributions (Savings Plans) or financed by company contributions (Employer Funded Plans).
The "Fully Paid Share Plans" come in three varieties - financed by loans to employees (Loan Plans), financed by employee contributions (Savings Plans) or financed by company contributions (Employer Funded Plans).
The following provides a summary of the four employee share schemes.
It is recommended that you seek professional help on the design and implementation of a plan of any type. The AEOA would be happy to provide more information and, if appropriate, refer you to others for expert advice.
Employer Funded Share Plans
In the employer funded share plan, a proportion of company profits is allocated to purchase fully paid shares for employees. The shares can be newly issued or purchased on the stock market and carry full voting rights and rights to dividends, bonus and rights issues.
THE PLAN
Employer Funded Plans may take many forms according to the philosophy and objectives of the employer:
• The shares are acquired as an added financial benefit to the employee (as an extension to profit-sharing or gain-sharing).
• Employees are not required to risk their own money or savings, but the plans have the flexibility to allow for those employees who wish to do so, to contribute through some ‘salary sacrifice’ arrangement.
• These plans are usually related to company performance, in that the amount the employer contributes towards the purchase of shares on behalf of employees is charged against annual profits (provided certain performance goals are achieved).
For example, these plans may work as follows:
- An employer uses say 5% of annual profits to purchase new or existing company shares on behalf of employees.
- An employee is allocated a number of shares (say 500) according to certain criteria (see “purchase criteria” below).
- 500 shares are now held in trust for the employee, and the employee receives dividends on 500 shares.
- Next year, the employer again uses 5% of annual profits to purchase company shares on behalf of employees.
- The employee may add, say, 1% of their gross pay plus 3% of any gain-sharing bonus and productivity bonus.
- The employee is allocated a number of shares, say 600, according to certain criteria (see purchase criteria below).
- 1100 shares are now held in trust for the employee, and the employee receives dividends on 1100 shares.
- As this continues from year to year, the employee’s share holding increases and so do the dividends.
PURCHASE CRITERIA
• A qualifying period of employment, usually one or two years of permanent employment with the company. This could be full-time or part-time employment, not casual employment.
• The number of shares allocated to each employee is usually determined by years of service, annual pay and/or management policy. This also depends on annual profits.
• The shares or share certificates are usually held by the trustee until they are withdrawn by the employee or the employee retires or leaves the company. In some cases, the employee must sell the shares on leaving the company.
SELLING CRITERIA
This is fairly flexible and ranges from no minimum period to a minimum period of twelve months or more.
TAX LIABILITIES
The tax assessment is very simple with these plans:
• Employers receive a tax deduction for the amount they subscribe towards buying the shares, because it is considered a cost of running the business. (This is only possible where the scheme involves shares acquired by an interprosed entity like a trust).
• Employees generally don’t get an up-front tax assessment for receiving the shares but, as per Division 13A of the Income Tax Assessment Act, employees pay tax when they withdraw shares from the plan. (There is a ten year time limit for those who are members of a “Tax Deferred Plan” and members of an “Tax Exempt Plan” pay no income tax on shares allocated up to the maximum discount amount of $1000 per year. Also, income tax must be paid on the full gain derived by the employee, compared with most investors who can take advanatage of the 50% CGT concession on any capital gains).
• Dividends are paid to the employee through the ESOP trust. The usual income tax rules apply here, including that in most cases any franking credits should flow through to the employees.
CONCLUSION
The benefit of such plans is that it costs employees nothing to become involved, so participation rates can be as high as 100%. The idea of getting ‘something for nothing’ sometimes means that owning shares under these conditions is initially regarded as a bonus, or savings. However, as time passes the ownership ethos may emerge.
A disadvantage of such plans is, if new shares are issued, will be to dilute the interests of shareholders in the employer - or, alternatively, if existing shares are acquired, the effect will be a loss of corporate cash flow to existing shareholders, rather than providing more investment in the workplace.
Loan Plans
THE PLAN
Loan plans (sometimes known as Employee Purchase Plans) have been very commonly used plans in the past (though less so since the 1996 legislation made it easier to adopt “Employer Funded Plans" such as the ‘Tax Exempt Plan’ and the ‘Tax Deferred Plan’).
Loan Plan design is quite simple. The employer offers shares to employees, often discounted by a percentage of say, 5% to 10%. To allow the employee to purchase the shares, the employer makes a loan or provides a loan from a financier to cover the full cost of the shares. When the employer provides the loan directly it may be at low or nil interest rates. Employer Loan Plans financed by the employer are sometimes called “Loan Back Plans”. They use fully paid ordinary shares and give the employees full shareholder rights to voting, dividends, bonus and rights issues. Some loan plans limit the employee’s personal liability to pay back the loan. This is achieved by the loan being secured by the shares and/or by a guarantee from the employer and/or obtaining the loan indirectly through a trustee company with limited liability and/or by the loan agreement eliminating the ability of the lender to sue the employee to recover any part of the loan. The repayment terms of the loan may vary from twelve months (as was the case with the Commonwealth Bank float some years ago) to twenty years (like the BHP Loan Plan of the early 90s).
In some cases, the terms of the plan may permit dividends to be used for repaying the loan. The loan may also be paid back from employee contributions, which may be related to the performance of the company. Loans may also be paid off from the cash obtained when the shares are sold. Employees may also choose to pay off their loans from their pay, or from other personal sources.
The reason for the popularity of these plans is that there is a direct and immediate ownership by the employee of fully paid shares with supporting finance that is simple and easy to comprehend. Some employers also consider that there is benefit in giving some risk to employees in that it exposes them properly to the realities of capital investment.
Put simply, this type of plan could work as follows:
• An employee is offered 500 shares with a market price of $4:00, less a 10% discount.
• The cost to the employee is $3.60 per share – a total of $1,800.
• The employee obtains an interest free loan for the purchase over say, 20 years.
• If the annual dividend is 20c per share, the employee will receive dividends of $100 each year.
• The total dividends over 20 years will be $2000
• Thus after 20 years, the $1800 loan will be fully repaid with a surplus of $200, and the employee will own the shares outright.
• Because the employee has purchased fully paid shares, they have full voting rights, receive full dividends and all bonus issues.
• During the loan repayment period, the employee may acquire more shares.
• As companies typically only pay out around half their profits as dividends, the value of each share should increase by around 20 cents each year at an increasing rate like compound interest.
PURCHASE CRITERIA
• A qualifying period of employment usually applies, often one or two years of permanent employment with the company. (This could be full-time or part-time, as it is permanent);
• The number of shares offered is usually determined by years of service, salary level or management discretion;
• A “Trust” may be established to hold the shares until they are paid for, although during the period of payment the voting rights of shares can be passed on to the employees by the trustee. Plans can allow the employee to elect trustees (as is the practice for superannuation trustees).
SELLING CRITERIA
Sale of the shares is usually subject to the following conditions:
• a minimum holding period, such as two years; and/or,
• after the shares are completely paid for; or,
• in some cases, there may be no restrictions at all, as long as the shares are paid when the employee is selling them.
TAX LIABILITIES
For the employer:
The fringe benefits tax does not apply to the low interest or nil interest loan, as long as the loan is not waived in favour of the employee and as long as it is for the purchase of Australian income-producing shares.
The employees may incur the following taxes:
• Discount value: If the shares were discounted at the time of purchase, the value of the discount may be assessable income for the year of purchase or on a deferred basis;
• Dividends: These will be subject to normal Income Tax. However, if the dividends are ‘fully franked’ tax would have been already paid at the company rate. This means that the shareholder receives a tax credit to offset against the income tax applicable on the dividend income (and so will not need to pay any further tax on the dividends).
• Capital Gains tax: The full value of the shares at the time of purchase is established as the base price of the shares. When employees sell their shares, any gains will be classed as assessable capital gains in the year of sale, less 50% if the shares have been held by an individual for at least 12 months.
Savings Plans
Savings Plans are common overseas, especially in the US and the UK and have some support in Australia. Under the terms of these plans, employees must save the value of the shares before they can purchase them. Employer Funded Plans can be expanded to include a savings component.
Some Savings Plans also offer opportunity for investment in outside shares (ie: in companies totally unrelated to the employer). These plans are not strictly employee share plans although they do encourage employees to think about shares as an investment medium.
Options Plans
An option granted by a company is a ‘right’ to buy an unissued share from the company at an agreed price at a specified time in the future. When the option is “exercised”, the option-holder is using his or her right to take up the shares. So, if the share price has increased above the agreed exercise price, the shareholder will make a profit. If the share price goes below the agreed exercise price, the shareholder normally would not exercise the option and it would lapse (ie: expire at the end of the specified exercise period).
The issue of options to employees in new ventures provides a cost-efficient way for shareholders to attract and remunerate people who have a pivotal role in creating value for shareholders. It also enables the new venture to be “financed’ by taking pressure off cash flow in the venture’s early stages through substituting a share of the future wealth of the business for salary or bonus payments.
THE PLAN
Employees may be given options at nil acquisition cost or at a minimal cost of say, 1 cent. These options must be exercised within a certain time frame, or let lapse. An option is not a share: a free or low-cost option still requires the option holder to pay for the share in the future, if he/she exercises the option, unless the exercise price is zero.
A very simple example of how an Option Plan may work is as follows:
An employee is offered 500 options @ 1 cent each for shares which can be exercised to acquire a share at $4:00.
500 options at 1 cent = $5, payable when the options are granted.
Two choices now (i) Exercise the options within 5 years, or (ii) Let the options lapse at the end of 5 years and lose $5.
Exercise price = Share value at time options are granted less 1 cent = 500 x $3.99 = $1,995
If the employee decides to exercise the options, this amount must be paid.
If two years later the current market value of the shares is $4.75, the total value of the shares is $2,375.
The employee may sell 420 shares to pay the exercise price (420 x $4.75 = $1,995).
This leaves the employee with 80 shares. (Note that, if sold, there will also be a tax liability on the profit ($315) from the sale of 420 shares, ie: $0.75 x 420 = $315).
PURCHASE CRITERIA
• A qualifying period of employment with the company maybe required. Employment could be full-time or part-time, but usually needs to be permanent rather than casual.
• The number of options offered is usually determined by annual pay level or management policy.
SELLING CRITERIA
• The options are usually not negotiable. An employee can either exercise them (ie: to purchase the shares) or let them lapse.
• There are usually no restrictions on selling the shares which are acquired by exercising options in companies listed on the Stock Exchange. However, in private companies there may be rules on selling shares and possibly using an “internal market” for the shares.
TAX LIABILITIES
Generally speaking - and this applies to all employee share plans – careful attention to proper design can influence the amount of tax payable and the timing of their payments.
For the employee, the tax liability works in the following way:
• If the employee elects, options may attract tax upon acquisition;
• Otherwise, options would be taxed usually when exercised, or upon cessation of employment if that is earlier;
• Capital gains tax may also be payable when shares are sold on any gain in value since the time the options were first taxed;
CONCLUSIONS
Options Plans have some advantages and disadvantages. For example:
• Employees acquiring options may not ever convert them into shares, so this could be seen as defeating the purpose of creating a sense of ownership and belonging;
• Options do not normally provide rights to attend and vote at shareholder meetings, until they are exercised and shares issued. This means that until such time, employees are not truly participating in the responsibilities of ownership and control. However, some employers may feel it is appropriate to maintian existing control, eg: family businesses or tightly held companies.
• Options carry minimal risk because, should the share value fall or the company go into liquidation, the option holders do not have to bear any losses, except for any nominal amount paid to acquire the options in the first place;
• Options are safe in that there is no ‘downside risk’ for the employee;
• Options plans have typically been used to attract and remunerate key executives, but they are sometimes now being made available to most staff in order to provide a more equitable distribution of employee shares;
• Options dilute the interests of shareholders - especially if they are free of charge or issued in large numbers - and so an ESOP using options may not obtain shareholder approval if not properly designed.
Most options plans allow the employee to sell their shares after the specified time qualification or vesting period, and subject to general sale restrictions contained in the employer company's constitution or any applicable shareholder agreement. If these requirements are met, employees may be permitted to sell a portion of their newly acquired shares immediately to cover the funding of the "exercise price" and any tax bill.
Partly Paid Share Plans
On the face of it, these plans may sound similar to Loan Plans. There is one very important difference; with these plans the employee pays part of the total amount, but there are no loans involved for the payment of the balance.
Here the employees are offered shares at nominal initial cost of say, 1 cent per share, with the rest payable usually at the discretion of directors (or in the event of death, retirement, redundancy or company liquidation). This can be a major draw back, because the outstanding amount owing on the shares is a debt legally enforceable by the company. If the directors lose control of the company (through takeover or from the company going into receivership or liquidation) the receiver or liquidator may call in the employee’s outstanding debt and could send employees into bankruptcy (as happened in the cases of Hooker and Kern Corporations in the past).
The directors do not have the discretion to forgive any unpaid liability without obtaining the approval of shareholders. (Approval of the equity court is required if then shares are to be cancelled).
Shareholders do not usually approve the non pro-rata issue of partly paid shares unless the rights attached to the shares are reduced in proportion to the value of the money paid up on the shares.
Complexity and risk make partly paid shares somewhat difficult to present to a broad workforce. Such shares have been used more in long-term management incentive programs where the communications task is easier.
The AEOA does not recommend the use of these plans as “all employee” share plans.
Replicator Plans
Some companies are not listed on the stock exchange and can offer employees what are known as “replicator” shares. These are artificial, or phantom shares designed to ‘mirror’ real shares, although they do not provide any legal entitlements to participate in the ownership and control of the company. These are usually used in unlisted or private companies where there maybe reasons why actual shares cannot be used (eg: taxation). They are sometimes used by listed companies which don’t want to issue any real shares to employees. The creation, rights and performance of replicator shares are subject to the discretion of the directors. They usually only provide employees with financial rewards such as profit sharing.
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admin
631 Posts |
Posted - 07 Jan 2007 : 07:10:37
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Conducting an Employee Survey
At some stage, you will need a tool to gather information about how employees feel about participating in an Employee Share Ownership Plan (ESOP). The following survey may be helpful. Such a survey needs to be distributed widely, making sure that all those likely to be affected have the opportunity to respond.
"SAMPLE EMPLOYEE SURVEY
The company is considering the introduction of an Employee Share Ownership Plan and would like your opinion on whether you think it is a good idea, as well as suggestions about how it might operate. If you would like to contribute your ideas, please complete the following questions. The questionnaire is NOT compulsory and you do NOT need to put your name on any pages.
Please return the completed questionnaire to: ……… by no later than …….
Questions:
1. What do you know about Employee Share ownership Plans (ESOPs)?
2. What opinions, if any, have you heard about ESOPs?
3. The company is considering making shares available for allocation to employees. What is your opinion on this?
4. How would you feel about taking up a shareholding in our company if some kind of ESOP went ahead?
5. What kinds of questions would need answers before you would make a decision about whether you would participate in an ESOP?
6. Do you think there should be some terms and conditions about who should be able to participate in an ESOP? (eg: should employees have worked for a certain time before being eligible? etc).
7. If the company offered employees the opportunity of a shareholding in the company, can you think of any ways in which the purchase and take up of a share might be arranged?
8. If you were to take up a shareholding, what would be your main reason?
9. How do you think owning shares in this company might affect employees?
Thank you. If you have other comments, we would like to hear them. Please write on the space below and return the sheet to the address provided by the due date."
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admin
631 Posts |
Posted - 10 Jan 2007 : 04:39:37
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Making Ownership Real to Employees Requires Education
It is sometimes heard in relation to ESOPs, that “the employees never really appreciated it” or “the employees never really started acting like owners”. Often employers say employees would rather have a cash bonus, even if the value of that reward is much less.
These reactions are understandable, but these problems could have been avoided or reduced if there were a better understanding of employee economics, as well as what makes ownership real for people.
Ownership Economics
One of the most important principles in compensation and remuneration planning is that people value losses much more than gains. If a company’s test of real ownership is whether employees will hold onto shares once they are awarded them, rather than selling them as soon as possible, then the same principle will apply. Most people – from shop floor employees to executives – won’t hold onto ESOP shares for more than the minimum requirement if they don’t have to. In doing this, they are simply protecting against loss. Trying to overcome these strongly ingrained tendencies is a frustrating battle. A second problem is the time horizon for ownership. Economists have found that most people would rather have $5 now then $10 next week. So imagine how employees react to the promise of an uncertain benefit to be paid some time into the future.
Natural Scepticism
A different problem is that many employees will be distrustful of the motivation for the ownership plan. When an ESOP is being used to buyout an owner, for instance, employees are heard to ask why the company needs to be sold at all. There are also fears that the company is in trouble, or that the cost of the buyout will ultimately be borne by them. Whatever the form of ownership, employees are also likely to know someone who worked for a company with an unsuccessful ownership plan, perhaps one that cost them their savings or where share options went up in smoke.
What Makes It Work
The first step is not to produce overblown expectations through overselling the plan. At the outset, you need to be very clear with employees why the company is doing this, what it expects from employees, what the risks are and what good can come of it. In other words - explain, don’t sell.
Second, understand that the financial benefit of employee ownership will be viewed with caution at best and scepticism at worst by most employees.
Successful ownership companies take the right to ownership as a given. The real challenge is creating a work process in which people think and act like owners. That means:
1. Sharing financial information at the corporate and work unit level, including ‘critical numbers’ goals that employees can easily grasp.
2. Teaching employees how to use the numbers.
3. Providing day-to-day structured opportunities for employees to have input into work-level decisions where they have some expertise.
4. Pushing down decisions to the lowest possible level.
These day-to-day changes in how employees are treated register with employees right now. They show management is serious about ownership, that it means something to their everyday lives. People don’t think about share values every day, but they do think about how they are treated every day. It also helps companies improve performance, so there is not much to lose by moving in this direction. Once employees “get it” about ownership culture, the equity package they are getting will start to seem appropriate, important and increasingly valuable.
Once you give people the tools and respect to start acting and behaving like owners, then you can expect real change.
(Adapted from “I Gave Them This Great Plan, and They Never Appreciated It”, NCEO Report, May/June, 2005)
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admin
631 Posts |
Posted - 13 Jan 2007 : 13:30:18
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Reviewing and Evaluating ESOPs
1. Key Review Criteria – Existing Plans
The following checklist was originally developed to assist those who wish to review the success of an existing plan. With some slight modifications, however, it can be equally useful to those charged with the responsibility of selecting the plan most suited to their organisation.
PART A
1. Does the plan still satisfy its original objectives?
2. What has been the effect of the plan upon the value of ordinary (non-employee) shareholdings?
3. Does the plan benefit equally those employees located in offices outside Australia?
4. Is the plan linked to organisational performance?
5. Do members take up shares directly, or through a Trust – is the current approach still the best choice?
PART B
1. Is the plan reviewed regularly to determine its continued effectiveness?
2. What do employees say about the value of the plans to them?
3. Is there a mechanism for separating plan costs and administration costs?
4. What are the costs to operate the plan?
5. What unexpected ‘opportunity costs’ have emerged?
PART C
1. In the event of a new issue of shares, what are the prospectus requirements?
2. If introducing a new plan, have the implementation costs – including the issue of a prospectus been considered?
3. What attempts have been made to contact organisations who have successfully implemented similar plans?
4. Are you aware of what company representatives are legally able to do to promote the plan prior to the offer?
5. To what extent can external advisers (consultants) be used to provide advice about the plan?
PART D
1. Have the relevant unions and employee groups been consulted in considering the most appropriate plan?
2. Who appoints and/or elects the trustees of the ESOP Trust?
3. Should the method of election/appointment of Trustees be changed?
4. Should the authority to buy or dispose of shares be changed?
5. For unlisted companies – should the method of appointing and/or instructing an independent valuer be changed?
6. Should any restrictions on the sale of shares be changed?
7. If a new plan is under consideration, how will shares be paid for?
8. What will be the effect of a new block of shares on the company’s Balance Sheet/
9. When do taxable events occur in the plan? Is there more than one tax point?
10. In what way is the employee shareholder affected by the following taxes?
• Capital Gains
• Income Tax
• Fringe Benefits
11. To what extent does the plan expose employees to any ‘downside risk’ if the share price should fall/
12. Is it likely that employees facing resignation or financial difficulties might have to sell their shares in order to repay any loan made to them?
13. To what extent are the expenses of operating the share plan (including the issue of discounted shares to employees) tax deductible to employees?
14. What is the extent of the company’s tax burden?
(Martin, 1993, from: “Understanding ESOPs” Education Pack, AEOA, 1995 )
2. Evaluating ESOPs
Different criteria is required to evaluate ESOPs depending upon which point of view is taken. ESOPs need to be designed to recognise the various viewpoints. Some viewpoints to consider are those of:
1. Employees
2. Employer
3. Shareholders
4. Unions
5. Tax collection by government
6. Economic policies
A checklist for evaluating any type of ESOP from the first three viewpoints is suggested below. The list is by no means comprehensive as the answer to many questions will lead to further questions. However, it should provide a guide to the sort of questions which should be investigated and indicate the need to find acceptable compromises and win-win solutions for the various parties.
A. EMPLOYEES
1. Financial exposure (downside)
(a) Does the employee have to invest his or her own cash?
(b) Does the employee have to provide his or her own assets (other than the ESOP shares) as collateral to obtain the finance to acquires shares?
(c) Is the employee exposed to any financial obligation?
2. Employee benefits and hazards (upside potential)
(a) Does the employee get clear title to shares?
(i) when is title provided?
(ii) are there conditions to obtaining title?
(iii) can the directors change these conditions?
(b) If the employee does not get clear title:
(i) who is the title holder?
(ii) who appoints the trustees or directors of title holding entity?
(iii) can the directors change the control of the title holding entity?
(iv) can the directors change the rules of holding title?
(c) If the employee does not get clear title, what rights exist to:
(i) voting ?
(ii) dividends?
(iii) disposal of the beneficial interest?
(iv) how is the price determined on disposal?
(d) Do the directors have the power to directly or indirectly reduce any of the rights and entitlements to beneficial interests in shares?
(e) If the employee does obtain clear title like any other shareholder, must the employee enter into agreement that the shares be sold when employment ceases or at some other time?
(f) If employees are required to dispose of their shares, how is the value determined and can this value be affected by those who control the company?
(g) Will the company directly provide shareholder information and allow meaningful participation in decision making?
B. EMPLOYERS
1. Cost to company in terms of:
(a) Finance
(i) cash to purchase shares?
(ii) opportunity cost of money loaned to finance share purchases?
(iii) loss of collateral to arrange purchase finance?
(iv) contingent liabilities to buy-back shares?
(b) Operating expenses
(i) establishment?
(ii) contributions to share purchase?
(iii) maintenance costs?
2. Benefits to company
(a) new source of low cost equity?
(b) improved productivity (less faults, costs, increased output, etc.)?
(c) improved industrial relations and corporate culture?
(d) attraction and retention of key employees?
(e) reduced staff turnover?
(f) additional option in enterprise bargaining?
(g) informed and committed shareholders to support management?
(h) management committed to support employees?
(i) provide sucession of owner/managers and so corporate idenity?
C. SHAREHOLDERS
1. Costs to investors
(a) dilution of equity when new shares issued to employees or options exercised?
(b) unfair competition to acquire existing shares through the market because buyers have inside information?
(c) loss of equity when options exercised or new shares issued to employees at excessive discount over market price or at a lower price at which the investors can acquire new shares?
(d) loss of performance from excessive control by insiders who bias deployment of corporate resources to insiders?
(e) loss of opportunity to sell shares at a profit from a take-over?
2. Benefits to investors
(a) additional source of equity to finance expansion?
(b) low cost technique for reducing borrowings and so risk of operations?
(c) support of share price through share purchases for employees?
(d) improved communications between employees and the board to identify flaws and remedies in performance?
(e) net increase in corporate performance and so investment value?
(Turnbull 1995: From “Understanding ESOPs” Education Pack, AEOA, 1995 )
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admin
631 Posts |
Posted - 03 Feb 2007 : 08:44:56
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State Taxes and Levies
Malcolm Martin of Martin Consulting advises the following:
Contributions of money or shares made to employee share schemes may be subject to State taxes such as Payroll Tax and Worker's Compensation levies.
Where the employee makes the contribution from their after tax savings, no State taxes would apply. Where the employer makes the contribution as part of the remuneration budget, then this contribution may be subject to State taxes.
There is a difference between the various States in the legal application and the rates of tax to be applied so advice may need to be obtained.
Alan Greig
AEOA
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admin
631 Posts |
Posted - 16 Feb 2007 : 05:35:05
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Doing Employee Surveys
Employee surveys can be a very good tool for getting feedback on all sorts of things in a company, as well as giving employees a chance to have some input into what is going on.
For surveys to be useful, however, they need to be very carefully designed and administered. There are several consultants who do survey work professionally. Surveys are available which have been specifically designed to assess employee ownership attitudes (For more information on this, see the “Ownership Culture” web-pages on the NCEO web-site at www.nceo.org. ).
While these surveys can be very high quality, many companies decide they can do it themselves. Like most things, doing it well yourself means being willing to spend a lot of time to learn the necessary skills. Some of the key points to consider are as follows:
Survey Design and Presentation
Open ended or multiple choice
Open ended surveys work only with a population accustomed to written expression and willing to take the time to think through the answers carefully. The responses are difficult to code and interpret. As a result, most surveys should be multiple choice. Use a five or seven point scale for answers so that there is a mathematical midpoint. These scales have been tested against other numbers and work best.
Short or Long
Short surveys get a better response, but a long survey can do just as well if the company makes responding easy or mandatory (see “increasing response rates” below)
Layout
Many software programs now have survey design templates. It is worth setting up a professional looking survey. You need somebody good at graphics and layout amongst your staff to do this.
Cover letter
A cover letter from the CEO should accompany the survey explaining what the company plans to do with the survey results and providing absolute assurance of anonymity. This might require some “independence” in the collection and interpretation of the surveys.
Survey Content
Figuring out what to ask is the hardest part of the process. The best advice is don’t try to do this at home. The wisdom of professional survey designers is readily available in all sorts of places. There are detailed sample employee surveys on the web. You can use these surveys in your own company. You can also seek information on the results gathered from those surveys that have been used.
Once you have these templates, you add specific questions for your own interest that have a similar format to the rest of the survey.
Gathering and Interpreting Results
Getting a high response rate is essential. Response rates under 50% within a company may not be reliable. To increase the response rate, set aside time and simply have people fill out the survey then, or give people the survey overnight and provide a small reward (eg: retail vouchers) for bringing it back.
When analysing the data, don’t just look at the simple response percentages to each question. These mean little in the abstract (what does it mean 70% like their job? Is that good or bad?). If industry wide data is available, use that as a benchmark; otherwise, regard the data from the initial survey as simply a baseline to see if you improve in the future. Generally, most people will express satisfaction with their work, so don’t take apparently positive results as necessarily good news.
It is also important to go beyond the simple response rates. Look at the relationship between the numbers. How do responses with some measures (pay satisfaction, or the ability to have input, for instance) correlate with others (how long you plan to stay with the company, for instance)? Looking at these relationships thoroughly can help you understand why people think and act the way they do and what things can be changed to make employee attitudes better.
Feedback
The most important step is one many companies ignore or gloss over. Make sure employees know what the survey showed. Get the results back to them quickly while the survey is still fresh in their minds. If the survey raises problem areas, show how you will address them, or better, find ways to get employees involved in dealing with them. That way, the survey becomes a step towards improvement, not just a way to satisfy curiosity.
In short, surveys are a lot of work, but worthwhile if done well.
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admin
631 Posts |
Posted - 12 Mar 2007 : 11:07:39
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Employee Stock Plan Basics
The US National Centre for Employee Ownership has a very useful web-page with the above title for those looking at the ins and outs of implementing an ESOP. This basic information is useful to Australian companies considering which way to go with employee share ownership (remembering that our tax and legal regime is very different).
The articles on the page explain the nuts and bolts of what kinds of employee stock plans are used in the U.S. for broad ownership, how they work, how companies can choose between them, and what they do for companies. The page is divided into information “For Companies Choosing a Plan” and “How Employee Ownership Works”.
The link to the web-page is as follows:
http://www.nceo.org/reference/plan_basics.html
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admin
631 Posts |
Posted - 14 Mar 2007 : 09:37:02
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Ingredients For Success
Communication is the key to success in designing, implementing and maintaining an effective ESOP. A properly designed plan will benefit your company – a badly designed plan can cause more trouble than it is worth. The most successful ESOPs are those which operate according to the simple and effective guidelines below.
What to do if you're serious about ESOPs
1. Show personal commitment to your ESOP – the commitment of the Board of Directors is essential to introducing and maintaining a successful ESOP.
2. Involve all the existing stakeholders – securing the full support of your partners or existing shareholders is also essential in getting off to a good start. The AEOA have worked with the Australian institute of Company Directors and the Australian Shareholders Association to establish a code of best practice for shareholders of publicly traded companies to approve ESOPs. (See February News on the “2007 News” page of this web-site for access to the third edition of these “Employee Share Ownership Guidelines” ).
3. Consult with your union and other employee representative bodies – consultation and co-operation will go a long way towards overcoming the traditional mistrust between employers and employees and resolving issues before they become problems. The Australian Council of Trade Unions has published a book to advise their members on ESOPs. The AEOA was a consultant to the preparation of this book. (See reference to this book “Handle with Care” and the “ACTU ESOP Principles” on the “ESO and IR Reform” discussion forum on this web-site).
4. Aim to include all your employees in the ESOP – so that you share responsibilities and the benefits of a united vision.
5. Show a commitment to employee involvement in decision-making – simply paying lip service to the concept of employee involvement is not enough. In fact, it can be damaging. Take the time to set up the structures and conditions to encourage genuine employee involvement.
6. Train your employees – ‘skilling up’ your employees is the best long term investment you can make. It gives your employees job satisfaction; it encourages better performance and improves the quality of employee involvement in decision-making processes.
7. Communicate information across the workplace – a well informed workplace functions better. It responds better to change and innovation and reacts more quickly to the needs of suppliers and customers.
8. Create symbols of ownership which reflect your commitment to the concept of employee ownership. This could be as simple as using a colour scheme which is clearly distinguishable from the company’s usual colours or logo.
9. Take time to get participative decisions – this may take a little longer but it will pay off eventually, because you will get better decisions and less resistance to their implementation. This doesn’t necessarily mean round-the-table discussions on every important issue: rather the creation of a work culture that welcomes staff suggestions and trusts delegated decisions.
10. Don’t expect pat answers or formulae – every company is unique and has its own weaknesses and strengths. Be honest in you’re assessment of your enterprise and you will be able to design a plan which will successfully overcome your weaknesses and enhance your strengths.
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admin
631 Posts |
Posted - 18 Mar 2007 : 06:40:48
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Companies Respond Positively to ESOPs
Some of the areas where ESOP companies have observed positive change include:
• Increased productivity through the sharing of responsibility.
• Improved communications with employees, now part-owners in the enterprise.
• Improvements in the overall work environment.
• Increased reward opportunities for employees.
• Changes in work and culture so that consultation and co-operation become the way things are done.
• An additional source of low-cost funding.
• The creation of buyers for the owner/managers who wish to retire from their business.
• Key staff are attracted and remain with the organisation.
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admin
631 Posts |
Posted - 24 Mar 2007 : 07:09:19
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Special considerations for unlisted public and private companies
The following is from the Employee Share Ownership Development Unit of DEWR web-site at:
http://www.workplace.gov.au/workplace/Programmes/ESO/Planninganddevelopinganemployeeshareownershipplan-aguideforemployers.htm.
The Corporations Act, taxation laws and Accounting Standards apply to all companies considering an ESOP, whether listed or unlisted, public or private. In many cases these regulations are more onerous and therefore more costly to comply with for unlisted companies than they are for listed companies. Some of the reasons for this include:
• unlisted companies have no ready ‘market’ for their shares
• stock exchanges set out the rules dealing with many rights and entitlements of shareholders, eg what happens in the event of a change in control. Unlisted companies are not governed by these rules, but need to deal with many of the same issues
• listed public companies are required to disclose financial and other information on a continuous basis, which means investors, including employee shareholders, are better informed. The Corporations Act provides certain relief from specific information disclosures for listed public companies that may not be available for unlisted companies
In summary, the key areas of special consideration for unlisted companies include:
Valuation issues
For listed companies the stock exchange provides a ready ability to determine the market price of a share. Unlisted companies do not have access to a market, and therefore, must rely on values determined by an approved valuation method. This can impose additional costs and complexity.
Liquidity
Most shares in listed companies can be freely traded on the stock market. There is usually no ready market for shares in unlisted companies. Therefore, in order to provide liquidity for ESOP participants an appropriate mechanism for buying and selling shares needs to be created. Again, this can impose additional costs and complexity.
Minority issues
The proprietors of many private companies need to have full control of their company to satisfy borrowing covenants, estate planning, tax and stamp duty reasons. It may be necessary for private companies to regulate an employee's rights under the plan to ensure full control in the event of dilution arising from an ESOP, eg through a ‘Shareholder Agreement’.
Change of control (for instance through takeover, initial public offering (IPO) or trade sale)
Change in control provisions for listed companies are regulated under the Stock Exchange Listing Rules and the Corporations Act. Plan rules to deal with all the possible change in control circumstances need to be precisely and carefully drafted for unlisted company ESOPs.
Prospectus and other relief provisions
In certain circumstances the Australian Securities and Investments Commission (ASIC) provides specific relief for listed public companies in respect of Corporations Act prospectus requirements and certain licensing (giving financial product advice and dealing in & holding of financial products) and hawking requirements. While some class relief is available for unlisted companies any substantive disclosure and licensing relief for unlisted companies is usually dealt with on a case by case basis. This involves matters like the lack of readily available financial and other market information on a particular company.
Privacy of information
An effective ESOP often relies on a full and complete disclosure of a company's financial performance to reinforce the aims/benefits of the ESOP to plan participants. Unlisted companies, including private companies, need to be mindful of the serious implications of restricting or censoring key financial information in the interests of preserving privacy.
A trustee of an ESOP trust may require an Australian Financial Services License, although ASIC provides some Class Order licensing relief in some circumstances.
Use of trusts
A trust is often used to hold shares on behalf of employee participants in ESOPs. Trusts are used for a variety of reasons, including:
• to administer the various performance and or vesting conditions that can apply to an ESOP. This is particularly important for share offers that are subject to forfeiture (eg. deferred share benefits)
• to enable the orderly and cost effective acquisition and disposal of small share holdings. This is particularly important for small thinly traded stocks and/or for foreign resident employee participants
• to ensure a company can adequately maintain and provide sufficient and correct information to employees ensuring they are aware of and are able to comply with their taxation obligations simply and easily
• to enable a company to control and manage its share registry costs
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admin
631 Posts |
Posted - 29 Mar 2007 : 05:39:52
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Handling the Repurchase Obligation
Some ESOP companies have to sell up or terminate their plans because they do not plan for their repurchase obligations. New ESOP companies need to understand what the repurchase obligation is, and how to project, manage, and finance it. ESOP repurchase obligations can be handled smoothly or they can create major crises. New ESOP companies need to explore with their advisors the various ways to assess the size of their obligation and how to manage it efficiently, including various funding options and plan structures, whether to recycle shares to the ESOP or retire them, and affect the impact of repurchase on valuation.
New ESOP companies therefore need to focus on the following issues involving share re-purchase and the establishment of “internal share markets”:
• Legal requirements
• Projecting the obligation
• Plan design alternatives
• Financing the repurchase
• Valuation and repurchase obligation
How ESOP Companies Handle the Repurchase Obligation is a book on the topic available from the US National Centre for Employee Ownership. In its third edition (2005), it is available for $25 for NCEO members or $35 for non-members.
Every private or unlisted company with an ESOP has an obligation to offer to buy back shares distributed to ESOP participants; this is called the "repurchase obligation." Written by leading experts, this book combines practical discussions with research in exploring the repurchase obligation and how it can be planned for and dealt with. You can see more on this topic at: http://www.nceo.org/pubs/repurchase.html .
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Going Ahead with Your ESOP
