A beginner’s guide to employee share ownership plan
Are you looking for new ideas to improve your company culture and build a sense of togetherness within your team?
When you give shares to your employees, the gesture is more than just financial compensation. It reinforces that everyone has a stake in your business’s success. Perhaps most importantly, it sends a clear message about what matters to the organization.
According to reports, 79 percent of American workers say company culture is essential in job satisfaction.
Even though an ESOP is tax-qualified, it’s not really about the money. If financial incentives were the priority, you could put more cash in employees’ paychecks instead of handing them shares.
You can build an Employee Share Ownership Plan (ESOP) without taking on additional costs yourself. The following employee share plan guide will explain how.
What Company Shares Can an ESOP Company Award?
What company shares can an ESOP company award depends on what you value most? There are two types of plans:
Under contributory share ownership, you contribute to your employees’ accounts based on the number of hours or days worked. You can also pay into their accounts for maternity and paternity leave, public holidays, and other periods of absence.
Under non-contributory share ownership, you don’t provide anything beyond your average salary or hourly rate. You can also award shares instead of paid holiday time, but you must pay for this. The decision is yours to make based on what matters most to your business.
You’re not obliged to offer any of these, but you must provide at least one. Otherwise, the tax benefits won’t be realized, and you won’t meet ESOP requirements. Rules for both types of plans are similar:
Employees become owners gradually over time based on their periods of service. They can cash out shares based on a vesting schedule. The rights depend on where you put them in the plan.
How Shares Are Awarded Under an ESOP Company Plan?
ESOP rules dictate the number of company shares you can award to employees. Everyone who works for the business for at least one year gets some equity in a contributory plan. In this case, your maximum contribution is 25 percent of the total payroll of $500,000. You have up to seven years to contribute in all.
In a non-contributory plan, everyone who has worked for the business for at least two years gets one share. In this case, you only contribute a maximum of 10 percent of payroll or $500,000. You have up to six years to reach this goal.
If you don’t want to establish an ESOP but still reward your employees with shares, there’s a simpler alternative:
There are two types of award plans:
Restricted Stock Award Plan (RSA)
A restricted stock award plan lets your employees receive company shares as an incentive for their hard work and dedication. You can either sell them at cost or offer them at a discount under defined conditions. Your business may also award them at no cost to the recipient.
Employees keep their shares even after they leave your company, but there are specific conditions for this under an RSA plan:
The award is non-transferable or subject to forfeiture. You can sell it back to the company on specific terms and conditions.
Stock Appreciation Rights (SAR)
A stock appreciation rights plan works like equity compensation in that you give employees the right to receive company shares. However, under SAR plans, they exercise this right when your financial performance meets specific benchmarks. They only realize their benefits when the share price has increased over time, so there’s no need to award shares at cost.
The Plan Documentation and Administration
When you create an employee share plan guide, there are specific details and legalities involved:
You must state your business’ financial performance as a benchmark. It is called the “trigger” in all plans, as employees receive their awards for the meeting. The actual offer of company shares is called the “distribution.”
You can either choose to have employees buy or sell their shares from your business when these benchmarks are met. In the case of a non-contributory plan, employees can receive company shares instead of paid time off. If you want to offer both options, it’s called a “cash and share” package.
Employees can understand that they have no legal rights to the shares, and these may be forfeited if they violate a specific clause or change jobs. You must also state that the company has no obligation to award any shares, even under an equity compensation plan.
Unlike most business decisions, taxes and laws play a significant role in your ESOP’s success or failure.
When choosing whether to create an employees’ share plan, you must match the benefits with your company’s financial state. You can take expert help from a legal representative or accountant to make the right decision.