3 Reasons you should implement ESOP
Updated: Jul 27, 2022
Employee Share Ownership Programs (ESOP), when implemented correctly, offer a number of valuable opportunities for your business to grow and thrive.
In this article, we explore three key reasons why your business should adopt an ESOP.
1) ESOP foster a culture of productivity, ownership and innovation
ESOP is directly linked to how well your business performs. Since employees effectively own a percentage of the company through their shares and equity, their compensation is tied to a company’s growth and performance in the market. If your company is successful, then so are your employees as they can obtain a great financial return on their equity. As a result, employees will be motivated to perform well and this in turn results in the company also performing well. This ultimately leads to a more productive environment, where employees will be committed to achieve their best for the business.
Thus, ESOPs create a greater symmetry between founder and employee interests, fostering an inclusive and productive culture.
2) ESOP helps to attract and retain top talent
There is a lot of competition between businesses to attract and retain top talent and by implementing an ESOP, your business is better able to retain that talent and minimise employee turnover. Creating an attractive compensation package for your employees will ensure high levels of commitment. Also, having an ESOP plan in place can see additional equity being given as a reward, allowing for a greater incentive for employees to remain with the business for the long term.
Generally, an ESOP has a vesting period of four years with a one year cliff. This cliff period is designed to keep new employees with the company because if the employee departs the business early then they will forfeit their options. Thus, employees are incentivised to remain with the company.
3) Tax advantages and cash flow flexibility
ESOP is often implemented for their tax deduction benefits. Many tax regimes around the world provide tax deductions on costs which a company may incur to acquire its own shares for the benefit of an employee ESOP.
Many companies, especially start-ups have stringent management of their free cash flow and implementing an ESOP offers a way in which to generate liquidity. ESOPs are advantageous in this regard, as companies can both offer competitive compensation packages to employees and generate the liquidity needed to invest back into the growth of the business.
Are you ready to explore what an ESOP can bring your company?
Evidently, there are a number of advantages associated with ESOP. With a proven track record and expertise in ESOP administration, OM Tech can simplify your ESOP management all at the click of a button.
Please get in touch with one of our helpful team members at email@example.com
Contributed by Ella Hall for OM Tech