Founder shares, employee shares, shareholders. These are the people at the heart of private business ownership. How these people arrive in these structures can vary greatly but one thing they have in common is a desire for liquidity. While the Syndex liquidity options are agnostic to the differences in share structure they all set out to achieve a fair, transparent and orderly system for share members to realise and extract the appropriate monetary value.

As a workplace incentive, profit sharing can be diced in different ways. Human resource departments consider employee plans that suit business strategy, culture and ethos, with the most commonly used known as Employee Share Ownership Plan (ESOP) and Employee Share Scheme (ESS). Stripping out the differences in tax implications etc both structures can flourish on the Syndex periodic market, as they do with our partners Jarden and Hobson Wealth. These enterprises plug in their chosen parameters to run a closed trading event whenever they want. This liquidity mechanism works best for growth companies with upwards of 50 employees. 

Here we go back to basics on profit-sharing plans as part of workplace incentives.

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What is an ESS?

A company with an Employee Share Scheme (ESS) allows its employees to purchase the company’s shares, often at a discount from fair market value. The shares may vest in tranches over a period of time, or based on certain individual or company-wide KPIs being met.

If the employee leaves, generally the rights to unvested shares automatically lapse and the company can purchase back the vested shares at either fair market value or a discounted rate depending on the circumstances in which the employee leaves.

An Employee Share Scheme (ESS) directly issues employees shares, and ESOPs give employees the opportunity to acquire shares in their own company through a share option plan. 

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What is an ESOP?

An Employee Share Ownership Plan (ESOP) is an employee benefit plan that gives workers company ownership opportunities in the form of shares of stock. Plans often deliver tax benefits to the company and the plan’s participants. 

A common approach to creating an ESOP the company take out a loan to fund a Trust. As the loan is paid off (by portions of wages that would have previously gone to employees) more shares become available. Employees hold these shares and can exit or trade them according to the liquidity mechanisms put in place. Some plans allow employees to acquire controlling interest once a threshold is reached.

Note: ESOPs are sometimes identified as employee stock option plans.

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What are the benefits of implementing profit-sharing workplace incentives?

The theory in this type of incentive is that employees that have ownership interest in their company work harder as business success translates into financial rewards. Staff feel more appreciated and better compensated for the work they do.

An employee plan can be an invaluable part of a recruitment, retention and reward strategy. 

Here are just a few benefits for both employers and employees:

Faster growth: ESOP/ESS companies grow fastest when ownership is combined with a program for worker participation. A synergy emerges between the two: ownership provides a strong incentive for employees to work productively, and opportunities for participation enhance productivity by providing channels for workers’ ideas and talents.

Retirement benefits: An ESOP/ESS is often utilised instead of, or in addition to, other employee retirement plans. 

Company protection:  Company ownership helps preserve the integrity of the business, protecting it from being dismantled, sold or other threats. Employees have a say in which way the company moves forward. 

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What are the drawbacks of implementing an ESOP?

Among the scrolls of research on ESOPs not many disadvantages are focused on. There is a cost involved to administer such plans which could increase if the complexity increases.

From an employee-as-an-investor perspective, there is an argument for a lack of diversification. There is a risk to any investor who has all their investments in one place - in this case, in one company. 

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Can a plan/scheme be administered in-house?

In theory it isn’t particularly difficult for a company to set up an ESOP. You start a trust fund, then contribute new shares of company stock to the plan or contribute cash for the ESOP to buy existing stock. 

For ongoing management of the plan there are two key parts; the corporate governance structure and the administration. The administration includes the accounting, managing compliance, managing employees joining and leaving the plan and yearly valuation of the business for taxation.

In-house a plan/scheme can be run by an accountant. The Syndex periodic market can be operated by a non-expert.

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How are the shares traded?

An employee can cash out of their ESOP when they cease being employed by the company. 

However, the vesting period must be over in order to receive everything due to them. That period is usually about ​four years​ after the first year of work, regardless of an employee's position within the company.

Some companies go one step further in their ESOPs and offer a liquidity mechanism. This can be in the form of a trading event whereby employees buy or sell shares in a fair and transparent arena. Offering liquidity makes ESOPs more attractive to employees and can increase take-up. 

Syndex offer this liquidity mechanism using either the periodic or continuous market functionality to enable trading. 

The periodic market* is a closed auction event whereby employees, via a dedicated portal, can buy or sell their shares. The defined and concentrated auction period drives high participation and activity. The administration platform is an independent, easy-to-use system that enables you to send bulk emails, define and run trading events, manage dividends and many other registry functions.

Hobson Wealth use the periodic market as part of its employee share scheme.

“For me, the registry element of the platform is more exciting than the trading. For a small finance team, the admin was a burden. The management of the scheme now looks very different to what it did previously.” 

“The pricing is good; it’s good value. It gets hard work done and as the scheme grows the admin won’t.”  - Mike Ellis, CFO, Hobson Wealth.

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*This product is only available for companies which hold an AFSL that allows for trading of securities and products under the current Australian legislative regime. This information does not constitute financial or legal advice. We recommend you seek your own independent financial and legal advice before undertaking any market related or trading activity.