ESOP Intrigue

There is a small group of companies in Canada that engage in Employee Stock Ownership Programs. Meaning employees are given a financial stake in the business. An employee stock ownership plan (ESOP) is a method of business that provides employees with an ownership interest in the company. These share purchases can range from zero to 100% of the company.

Canada is currently lagging behind countries like America, where 17 per cent of American’s employees own stock where they work. Ms. Beatty, coauthor of Employee Ownership: The New source of Competitive Advantage says, “In addition to the relative lack of tax incentives that promote employee ownership in Canada, I think there’s also the issue of companies not knowing very much about it.” Ken Tencer, CEO of SpyderWorks, agrees that employee ownership is a little known concept for many companies. In a Globe and Mail article entitled: Why You Should Give Your Employees a Piece of the Company, he explains how business owners who are nearing retirement and looking for someone to take over the company “tend to look for suitors from the outside, and too many times new owners come in, fire a lot of key individuals, break a lot of relationships, and the value of the business is lost. Whereas with the right group of employee owners, you have people who are already engaged in business and are motivated to remain innovative and mind the business.” In the same article Doug Flynn president and CEO of Flynn Canada is quoted: “If you had told me 10 years ago that Flynn would have 57 owners some day, I would have said, ‘no way,’…but now, looking over the last 10 years, I’m thoroughly convinced that we couldn’t have grown the way we have if we didn’t have our equity program.”

A business that is run by employees who are financially invested through stock ownership plans experiences job satisfaction amongst its employees and a greater sense of worker loyalty. Ultimately, employees are more committed to the success of the business; this is reflected in the work that they do.

ESOPs have been used and have preferential legislation in the US since 1974 and currently are the jurisdiction of the individual provinces. Currently ESOPs are used by a third of the top 100 companies in Canada. For these companies, their most cited reason for using an ESOP was for recruitment followed by fostering a sense of ownership and entrepreneurship. With the use of ESOP there is a far lower turnover and the time needed to cultivate a standard of quality.

Companies that use ESOP are 50% more productive after their introduction, which increases the value of the company for the seller. ESOP also ensures that key staff for the long-term viability of the company, are retained and the company remains productive. With this there is also the cultivation of trust amongst company owner-employees who take pride in their work and with financial investments they have a higher incentive to see the business succeed. ESOP is also an exit strategy for any size business in which shares of the company are given to the employees as a retirement option. These expenditure savings are then credited to the owner of the company. The shares are held in accounts until the employee parts with the company through retirement or end of contract.

Employee stock ownership plans are a financial instrument, which executives and business owners can use to entice new talent, maintain a standard of quality, ensure a higher return on the sale of the business and ensure a positive legacy as a part of their exit strategy.

BMF consultants expect to see a rising trend in the use of ESOP in Canadian business. We are prepared to offer advice on why this might be the right method for your business and to assist your company in the implication of employee ownership programs.