Employee Share Option Schemes | The Next Big Thing In Management - 28 Jan 2010

Employee Share Option Schemes | The Next Big Thing In Management

The next big ‘thing’ is more often than not an old fashioned and
tried and tested ‘thing’ with a shiny new layer of gloss and some
lessons learnt thrown in to the pot. The same applies in management and
in my view, the coming business year will see a greater focus on
employee incentivisation, specifically how giving executives and/or
employees some sort of shares in a company can be the key to unlocking
your business’s potential. What greater way to motivate each and every
staff member than by giving them all a little piece of the pie?

Employees share option schemes (ESOPs), pension plans (such as the
USA’s 401k) or Enterprise Management Incentive Schemes (UK) are common
in publicly traded companies across the globe. Share price data is
publicly available information and those shares are therefore tangible
and easy to buy and sell. Equivalent schemes in private companies are
less widespread however a practical program for the business with a
notional trading platform and ‘shares’ for staff is certainly
implementable.

The economic challenges we are all facing compound the view that
current incentives are inappropriate and can lead to problems triggered
by a lack of short, medium or long term accountability for corporate
decision making. Bonuses are generated by short term deliverables which
may not be in the best interest of the company and a logical
replacement to this practice is a more long term, golden handcuff
arrangement. Share schemes are a safe and fair way to motivate staff
whilst ensuring their goals are entirely aligned with those of the
whole company.

The USA has typically led the way for such private share schemes,
typically known as phantom stock options or stock appreciation rights
(SARs). One of the founding fathers of such practice was UPS, founded
in 1907. Until its listing on the stock exchange in 1999, the company
was broadly owned by non management, management and supervisory
personnel – a practice established by Jim Casey in the 1920s when he
gave staff the opportunity to purchase company shares. UPS regularly
ran a stock purchasing program before the IPO where staff could trade
shares. In January 1997 the price was set at $29.25 and by March 1999
it had risen to $47.

In November 1999, the Company offered 10% of its stock to the public
for the first time and on the first day of trading, the stock closed at
$67.25. Not only did employees benefit until 1999 with the phantom
scheme but with the IPO, they had a second and larger windfall with an
even more liquid platform on which they could trade their shares. Hard
work and loyalty were repaid twice over.

Why should you offer shares to your staff? It motivates employees,
improves firm performance, fosters innovation and promotes sound
financial health. It promotes staff loyalty and attracts and retains a
high caliber of staff who want to have a vested interest in their
future. To give staff the status of part owner of a business is a very
powerful motivator.

There is of course a cost in implementing such schemes because you
will undoubtedly need advice from specialists. There are accounting and
tax issues at play here and it is critical to ensure that the framework
you build takes into account local tax issues, accounting implications
for your balance sheet and other miscellaneous issues such as ensuring
that you allocate enough stock to a trust so that future employees can
benefit, ensuring the vesting period is appropriate. Yes they cost
money but perhaps the money spent on rolling one of these out would be
made back, and several times over, by an all round improved performance
by staff.

OnSite Consulting is a nationwide hospitality and consulting
company to the casino, hotel & restaurant market. Providing
immediate solutions for sites seeking turnaround, insolvency and
concept repositioning. www.onsiteconsulting.com