ESOP Success Stories During the Challenges of COVID-19

5 Oct 2021

Recent more severe Delta variant outbreaks have led to weaker forecasts for national economic performance. In June 2021, GDP growth was expected to be 3.5% over 2021-22; however, it’s now only predicted to grow by 1–2%.

While headcount and salary cuts are common strategies of businesses trying to survive a downturn, Employee Share Ownership Plans (ESOPs) should be a viable alternative consideration.

Curious to learn more? Read on as we outline our top ten tips for how to create your own ESOP success story. But first, let’s explore some of the impacts of traditional cost-cutting measures vs implementing ESOPs.

Comparing traditional cost-cutting measures with ESOPs

Traditional cost-cutting measures can help keep businesses afloat in the short term, but they can also create undesirable consequences longer term.

Research indicates that even a 1% reduction in headcount during a downsize could result in a 31% increase in voluntary resignations the following year. What’s more, company finances may not benefit from downsizing, according to researcher Franco Gandolfi, who states:

Unequivocally, the overall picture of the reported financial effects of downsizing is bleak. While a few firms have reported some financial improvements, the majority of surveyed firms have been unable to report improved levels of efficiency, effectiveness, productivity, and profitability.

In contrast, recent research shows that Australian companies with employee equity plans experienced higher staff retention rates and increased productivity. What’s more, a study by the School of Management and Labor Relations at Rutgers University and the Employee Ownership Foundation has found that companies with ESOPs have been “dramatically outperforming” non-ESOP companies during the pandemic by being:

more likely to retain staff at all levels by a ratio of 4:1; and
“significantly less likely to cut employee hours or pay”, with only 26% of ESOP companies cutting employee pay in response to COVID-19, compared to 57.3% non-ESOP companies.

The Instrument is a positive act that formalises ASIC’s position and has been issued under the powers granted to ASIC by the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Temporary Measures) (summary available here).

Top 10 tips for creating your own positive ESOP stories

Our team of employee share plan experts have prepared these tips to help your company to create a successful ESOP:

Ask these key questions before adopting an ESOP:

• Is your company looking to reward employees based on long-term achievements?

• Do you want to instil ownership thinking into your employees?

• Is your company considering replacing short term cash rewards with long term equity rewards?

• Do you want to incentivise employees to achieve specific outcomes? ie. TSR, ROE, client retention, etc.

Be open-minded: As seen above, it is possible to secure your company’s future in a downturn by realising the potential of your existing workforce through an ESOP instead of traditional cost-cutting measures. Remember that an ESOP is not a short-term win but a long-term business strategy.
Introduce long term incentive schemes: Replace short term cash bonuses with an employee equity plan or share option scheme to increase your company’s financial liquidity.
Increase employee rewards: If you have an existing ESOP, increase rewards for those employees who enhance (or reduce) your company’s cost structure and boost operational efficiency.
Revise current ESOP performance metrics: Lower the Total Shareholder Returns (TSR) to an achievable level and increase time frames for performance evaluations.
Consider broad-based ownership plans: An ESOP arrangement where all employees are invited to participate instead of only specific individuals. It can help to foster an ‘employee as owner’ mindset throughout the company.
Adopt a bonus reserve: This can be used to fund incentive schemes.
Develop a comprehensive staff communication plan: It can be difficult to understand the concept of share ownership. To boost employee participation in ESOPs, companies should clearly explain their purpose and value.
Make ESOPs more user-friendly: Use purpose-designed employee equity plan portals like EmployeeServe to give employees fast, accurate, secure access to their ESOP benefit information while reducing your administrative burden.
Consider outsourcing your ESOP: Instead of allocating in-house resources to time-consuming ESOP admin work, outsource to a specialist provider like BoardRoom for efficiencies and an enhanced employee experience.