Employee stock options can help to secure the financial future of your workforce. But cost anxieties and the lack of information might be holding back participation in the employee stock ownership plan (ESOP). In this article, we discuss:
- The benefits of ESOPs for both employees and employers
- Five ideas to increase the participation rates
- Why the timing couldn’t be better for this benefit
If you get it right, employee stock options can be a pertinent tool to drive growth for your company, as well as being an attractive component of your benefits package. According to The National Center for Employee OwnershipOpens a new window , there are approximately 6600 ESOPs in the US today, with over 15 million participants.
If your company provides employee stock options, you need to ensure that the workforce knows all about this benefit and makes an informed decision about subscribing. This makes it vital to have an adoption strategy in place to maximize the benefits of ESOPs.
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What Are Employee Stock Options?
First, a quick definition of employee stock optionsOpens a new window . Formally known as employee stock ownership plans, ESOPs offer employees a share in the company’s profits in lieu of a benefits component. For example, instead of 10% of compensation, employees can choose to receive a specific number of shares. As the value of shares goes up over time, employees can realize a substantial profit.
Starbucks is a great example, with its large-scale ESOP program. Original employees who had joined as baristas have earned several times their investment in share value.
Are Employee Stock Options Good for Both Employers and Employees?
So, why do you need employee stock options at your company? Briefly, there are four benefits:
- As an employer, you don’t need to pay taxes on your contribution to an ESOP plan. Employees don’t need to pay tax on their investment either.
- Employees at a recognized publicly-traded company gain financial assurance for their future, even after they leave the company or retire.
- There are other monetary upsides as well – like job security, better creditworthiness, and a sense of belonging with the company.
- Employees with a direct stake in your company’s future are likely to perform better, as they will reap direct rewards from increased profitability.
However, there are anxieties around employee stock options as well. Your workforce may be worried about the company’s long-term viability and choose to opt-out of ESOPs.
Here’s what Aaron Shapiro, founder of Carver EdisonOpens a new window , had to say: “One of the main reasons that more employees do not participate is because it’s difficult for stock plan administrators to get information out to all employees, at the same time, in their own languages, as part of a cohesive campaign that they will respond to.” So, how can you address this?
Let’s look at five ideas.
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5 Tips to Increase ESOP Utilization Among Your Workforce
Despite the clear benefits of using employee stock options, adoption rates aren’t too high. The National Center for Employee Ownership found that just 8% of all corporate equityOpens a new window is owned by employees. Lack of awareness is a big challenge, believes Shapiro, and another one is the cost component. By carefully articulating your ESOP administration strategy, you can address these challenges. Here’s how—
1. Offer cashless transfer of funds
A major factor impeding the popularity of employee stock options is the sheer inconvenience. Employees must take out a certain portion of their paycheck and deposit it to the employer. The company, then, adds its own share before the benefit can be processed. You can simplify this process by opting for a cashless model.
Shapiro shared an example of how it could work: “Employees sign up for their company’s stock plan and select an amount to be taken out of their paychecks—say, $100 every two weeks for six months. Right before the end of that six-month period, Carver Edison writes a check to the employee’s company for the difference between the employee’s contribution and the maximum allowable under their plan.”
2. Implement an employee stock options portal
This is critical in the digital era. Your employees want full visibility into all their compensation components, including employee stock options.
An online portal, accessible from any device, will help track how much they are investing over the years, the contributions made by the company, and options to sell their shares, if they so choose. A portal will instill a sense of empowerment that is key to boosting adoption for ESOPs.
3. Create a knowledge repository for ESOP management
“Since these are not benefits that employees will look into themselves, a necessary step in ensuring higher participation levels lies in making it easier for stock plan administrators to get information to them,” said Shapiro.
This knowledge repository will work as a one-stop gateway for any content on employee stock options, allowing your workforce to self-serve their queries. There should also be value-added content going beyond FAQs – maximizing ESOP investments, tips on when to sell shares, 360-degree financial guidance, etc. All this will help make ESOPs part of an employee’s larger financial wellness plan.
4. Conduct surveys on ESOP effectiveness
Remember, the success of employee stock options is dependent on how your company is doing in the market. As a result, employee satisfaction with ESOPs will vary significantly from quarter to quarter.
Conduct regular surveys to figure out the exact employee sentiment around ESOPs – do large groups want to opt-out? Or do they want to increase their share of investments in response to a bullish market? Or maybe they would like to tweak the administrative details to increase profitability.
For example, Carver Edison lets employees invest up to the maximum amount permissible in their plan without taking it out of their pockets. It then auto-trades the shares behind the scenes to repay this amount, submitting the net shares to the employee. “An average employee will own between 50-150% more stock than they could ever by on their own,” Shapiro said, explaining the benefit of this tactic.
5. Make employee stock options part of your EVP
At Starbucks, every employee and candidate knows all about ESOPs – that’s because it’s central to the company’s employee value propositionOpens a new window . It calls every barista a “partner” and ratifies this with a share in the company’s profits.
You can mention ESOP when conducting your recruitment marketing campaigns, boldly advertising its benefits to attract interested candidates. This will help recruits hit the ground running once they join the company, increasing the likelihood of adoption.
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Why ESOPs Are More Important Than Ever Before
At a time when financial wellness is a vital concern for employees, ESOPs could prove to be a game-changing benefit. A 2019 survey Opens a new window of 1500+ full-time US employees by PwC found that 59% of respondents are stressed by money matters; over 80% believe that they will have to work during retirement.
ESOPs give your workforce the financial security they need to plan ahead and follow their professional targets with confidence. All you need to do is get the information out there, streamline employee stock options administration, and make the process as transparent as possible for your workforce.
Do you think employee stock options are an important benefit for workforces today? Tell us your views on FacebookOpens a new window ,LinkedInOpens a new window ,or TwitterOpens a new window . We’d love to hear from you!
