Creating and offering remuneration packages is perhaps one of the most effective ways to encourage existing employees to perform their jobs more effectively while attracting prospective talents. It may also increase their loyalty, thereby lowering the possibility of sudden resignations. Hence, when starting a business, the startup must have a remuneration package for its future employees.
In these cases, there are typically two options to choose from: employee share scheme (ESS) or employee share ownership plan (ESOP). Although the two carry some similarities with each other, they’re two different options.
Now, you’re probably wondering, ‘Which of the two should you choose if you plan on building a remuneration package for your employees?’
To answer that question, it might be best to look at an overview of each type first, starting with the employee share scheme.
What Are Employee Share Schemes?
An employee share scheme (ESS) is a type of remuneration package that aims to provide employees the ‘right’ to purchase a company’s shares, hence the name.
The company typically offers the share at a lower price than the regular market value. Depending on the contribution of either each employee or the KPIs of the workforce as a group, the total shares that employees can buy may vary. The shares can be as high as 20% of the company or as low as 10%.
If the employee leaves before using the shares, the company may purchase back the shares they’ve earned in either its regular value or at a discounted rate. This would depend on the reason why the employee is leaving the company.
What Are Employee Share Ownership Plans?
In contrast, an employee share ownership plan provides employees an option to purchase from ordinary shares. Yes, an ‘option’ and a ‘right’ are different from each other, at least in this context.
In an ESS, employees can obtain shares right from the get-go, while in ESOPs, employees are only granted options, which they can convert only after meeting the vesting requirements. Apart from this, there are many other differences between the two, such as their scope.
How Can You Employ These Plans?
When rolling out an ESS, you’re legally obliged to offer at least 75% of your employees the share scheme. So, if you have 40 employees, at least 30 must be eligible. This value may vary according to the country.
On the other hand, if you’re planning to create an ESOP, the scope would depend on your preferences. You can choose to offer it to only half of your employees or to all of them. But, of course, you have to consider your employees when making such a decision.
How Do You Inform Your Employees Of These Plans?
Naturally, if you’re creating a remuneration plan for your employees, you must make sure they’re aware of it. The good news is that employee share schemes are much simpler than ESOPs, so most people are already familiar with this package.
Meanwhile, ESOPs are relatively difficult to understand, so not many are familiar with their concept; even employers such as yourself struggle to understand it fully. That’s precisely why employers often seek the help of an ESOP counsel to understand its concept.
If you’re planning on building an ESOP, you must also schedule a meeting to discuss it with your employees.
What Do You Give To Employees As Part Of These Plans?
You’re probably wondering if, apart from the shares, your employees would also get additional benefits. If so, you’re partially correct.
With ESS, apart from providing your employees the right to purchase the company’s shares, they are also entitled to attend and vote at meetings, especially since they’re technically one of your stakeholders.
However, when it comes to ESOPs, you only have to provide them with shares, unless, of course, they purchase the stocks not as an employee but as an investor.
What Should You Set As The Price For The Shares?
As stated earlier, shares in an ESS are typically bought by employees at a lower price. This is mainly because you can choose to provide them with a discount. However, they must pay at least 85% of its market value upfront, so the discount can only be as high as 15% if you’re generous. It’s also advisable to offer the lowest price if you’re aiming to attract prospective talents with this remuneration package.
With ESOPs, the pricing would be a bit complex. This is mainly because instead of selling the share to employees at its current market value, its price should be set at the market value when the option was first granted to them.
To illustrate, suppose an employee applies for the ESOP in 2018 when the market value of your shares is USD$3. If that employee meets the vesting requirements in 2021, when the market value is now USD$6, they would pay USD$3 instead of the current price. This is one of the main reasons why it’s one of the most effective ways to boost one’s retirement plan.
One of the most important considerations of employees when choosing a company to work for is the benefits. These may include medical insurance, retirement benefits, and profit-sharing plans. The beauty of remuneration packages is that it both counts as profit-sharing and retirement benefit. So, offering these packages essentially makes your company a lot more appealing to prospective talents than other organizations in the same industry.