Personal Finance

Why businesses require staff share option plans


Bob Moore, the owner of a successful natural foods company, celebrated his 81st birthday in a lavish celebration. He had a huge surprise for the staff. During the event, he launched an employee stock ownership plan that benefited almost 200 workers.

Some major challenges that businesses have when it comes to human resources are staff retention, motivation and reward.

Businesses can use employee stock ownership plans (ESOPs) to achieve these and other goals. Though not commonly used in Kenya, businesses can consider setting up simple structures that mirror this concept.

An ESOP is a scheme through which employees are granted company stock based on the duration of employment. It is a tool that benefits both the employer and employee. It is usually pegged on the number of years that an employee works with a firm.

The longer one stays with the business the more the shares one earns. ESOPs are, therefore, powerful tools that can secure long-term staff commitment.

They are attractive where the employer has invested in staff training and development. Staff exits negatively affect businesses because they have to invest a lot of money in re-training new staff.

ESOPs have several benefits. First, they help in attracting and pooling the right talent in a business. They also create wealth for staff. When a staff member exits or retires, one has a good take-home package from the ESOP.

Therefore, the schemes are additional retirement benefits.

ESOPS help in motivating staff and building team spirit. They are very useful when it comes to corporate strategy as they align the staff and shareholder vision.

The staff can buy into the shareholders’ vision better through an ESOP. They also unite the shareholders and staff. ESOPs as in the case of Moore can be used in succession planning.

While they have several benefits, they are very expensive to set up and administer.

Public companies in Kenya will require approval from the Capital Markets Authority before they can list. While unlisted companies do not require this approval.

ESOPs are set up through a trust mechanism. This means that the ownership of the ESOP is through a trust fund.

The company sets up a trust, draws a trust deed and appoints trustees to manage the fund.

The employees are then given certificates of ownership in the trust representing the number of units owned by particular staff.

The trust deed is the governing instrument that determines the rules and regulations of the ESOP. The trustees of the scheme hold shares in trust for the staff.

When a staff member exits then the trustee will buy back the share and pay the exiting staff cash equivalent to the share value.

The model is such that employees do not directly own shares in the business but are paid cash equivalent to share value when they exit.

A small business can consider giving some shares to staff to secure their long term commitment.

However, the shares given to employees would not have equal rights to the stocks held by the founders, it would call for the creation of a special category. I recommend the creation of a class with non-voting and deferred rights when it comes to the payment of dividends.

Dividends are payable after all the other classes of shareholders have been paid and a profit made. This class of shares would also be redeemable stock such that if the staff exit then the company acquires back the share at a fixed price.