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Personal Finance

Consider rewarding employees with shares

Workplace. An employee leaving a firm sells his shares back to the company at a value. Photo/FILE
Workplace. An employee leaving a firm sells his shares back to the company at a value. Photo/FILE 

Human capital is being recognised as an important resource by many firms.

Nowadays employees are keen on improving their skills so as to add value to employers.

Employers, on the other hand, are seeking ways in which to attract the highest qualified employees and keep them whether by remunerating them well or through employee benefits.

Employers have recognised the importance of motivation on performance.

Those who have established a long term relationship with their employees are seeking ways of rewarding them for loyalty.

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The same applies where the employer wishes to retain valued employees.

One of the best ways in which an employer can attain the above objectives is by the use of ESOP — Employee Stock Ownership Plan.

Regulatory approval

An ESOP allows employees to buy some shares in the company that employs them.

In Kenya, most listed companies have formed ESOPs as a motivation for employees.

For larger public companies, forming an ESOP is a complicated process that requires regulatory approval, the simple reason being that ESOPs involve dealing with shares.

In other jurisdictions there is specific legislation on ESOPs.

An ESOP is formed by an employer company creating new shares for issue to employees.

The employer sets up a trust fund that runs the newly created shares on the employee’s behalf.

The trust fund then distributes these shares to employees according to their rank, remuneration and length of period with the employer.

Each worker has an individual account. An ESOP allows employees to participate in decision making through the main body.

An employee leaving the firm sells his shares back to the company at a value.

This model works for large companies. In as much as it seems complicated, smaller companies wishing to reward employees for loyalty may adopt the same model.

A small company can issue a small chunk of its shares to a trust fund set up on behalf of the employees.

Legal issues concerning ESOPs are many. The management faces the risk of losing control of the firm as decision making is shared.

The trust fund becomes a shareholder entitled to vote on major decisions.

The trust fund may also use the protective covenants in the Companies Act, that are mainly geared to minority shareholders, to wind up the employer.

An ESOP, therefore, is best suited for an employer who is willing to share control with employees and also attractive to an employer wishing to exit the business.

ESOPs are a good succession plan as the founder of the business would like to leave it in good hands. In such a case, the trust fund acquires the employer.

ESOPs are complicated and give rise to litigation in most cases. A leading Kenyan bank is being sued by former employees over an ESOP arrangement.

If the employer feels ready to let go of control, is looking for a successor, or leaving the country then an ESOP is a good idea. He should remember that workers who own shares feel driven to perform better so as to increase share price value.

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