When a corporation or a startup decides to implement an employee stock ownership plan, they have two major goals in mind, to give workers company shares as a reward for their good work, and to make the company grow.
It is a common question that comes to mind after learning about the problems that start-ups face - how is it possible for a start-up to retain its top employees who are building the company from the ground up when they are unable to pay them hefty salaries that will keep them happy, satisfied, and motivated to work and keep working for the company?
An excellent solution to this problem that is highly popular in start-ups - employee stock ownership plan, or ESOP. When a firm or a startup chooses the employee stock ownership plan, they have two primary aims - to provide company shares to employees as a bonus or reward for their hard work, and to motivate them to work for the company’s growth.
The first is to employ the best in the market or industry, and the second is to keep the best that they have hired for a long time, both of which may help the company make the most of its hiring and turn a profit, as well as achieve the break-even point faster and more efficiently.
Let us understand some major points in detail.
They Provide an Appealing Exit Strategy for Owners
Employee stock ownership plans (ESOPs) provide employees equity ownership in the firm. As a result, employees become part-owners in the business. Some entrepreneurs form an ESOP as an exit strategy if they decide to quit their businesses. Making an ESOP before leaving a business also ensures that any stocks held in cash on the day of the sale are sold at their fair market value. Furthermore, even if a person just sells a portion of their ownership stake, they retain control until the whole money is received.
Boost Employee Productivity and Morale
Various studies, however, show that capital-sharing arrangements, such as ESOPs, might increase employee satisfaction and motivate people to work more than they would otherwise. According to another study, ESOP firms expanded 5% quicker than non-ESOP enterprises. This might happen, in part, because employees are emotionally involved in the firm and want to assist it achieve its objectives.
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Retain employees even if they are paid less
One of the most common challenges faced by startup owners is to determine how to retain staff motivated despite lower-than-average compensation. Because ESOPs provide workers with ownership holdings, they may assist future and present employees realise that benefits come in a variety of shapes and sizes.
Employee stock ownership plans (ESOPs) can provide employees a stronger feeling of belonging, enhancing their long-term commitment to the firm. As a performance reward, employees in an ESOP might get stock options. If the company can't afford to pay them regular incentives, stock options are another way to express appreciation for good performance.
When deciding if an ESOP is a good choice for your firm, careful preparation and understanding are required. Understanding the benefits, drawbacks, and accounting implications of ESOPs as early as feasible in the planning process can help you make an informed decision.