What is an ESOP?
Under this acronym are two terms – Employee Stock Option Plan and Employee Stock Ownership Plan. Both mean virtually the same thing, although some sources say that the abbreviation containing the word “ownership” should apply only to the equity variant, which we will talk about later in the article.
An ESOP is a form of compensation that in many ways resembles a loyalty or incentive program. Under it, the company transfers shares in the company to some employees, making them co-owners. This is a popular solution especially in startups – shares can be a form of signing bonus or used to retain top talent in the company.
Can only employees be covered by a stock plan?
Employee Stock Option Plan is a solution that can be successfully applied to contract employees, but also to contract employees, consultants or consultants. A variant of the ESOP is the MSOP – Management Stock Option Plan – under which shares are rewarded to company executives. In reality, however, the separate name is used only to distinguish between two parallel programs operating within the same company – their goals and objectives are usually similar, and their terms and conditions – depending on the company’s arrangements.
ESOP and Polish law
The Polish legal system still lacks specific provisions referring directly to ESOPs. It’s a situation that, on the one hand, may be desirable for entrepreneurs – it allows them to take a fairly flexible approach to creating the program and setting its terms – but on the other hand, it’s not easy to predict what legal consequences some decisions will have. It is also to be expected that these issues may be regulated in the future, which will translate into the need to modify the provisions of the ESOP to bring them in line with current law.
Important!
In searching for the definition of ESOP, it is worth reading carefully Article. 24 para. 11b of the PIT Law. The document includes information on incentive programs. However, the regulations only cover joint-stock companies:
Incentive program […] means the remuneration system established on the basis of a resolution of the general meeting by:
- joint-stock company, for persons obtaining benefits or other receivables from it […],
- a joint-stock company that is the parent company […] in relation to the company from which persons entitled to receive benefits under this remuneration scheme receive benefits or other receivables […],
– as a result of which persons entitled to receive benefits under this remuneration system directly or as a result of the exercise of rights from derivative financial instruments or the exercise of rights from securities […] or the exercise of other property rights, acquire the right to actually take up or acquire shares in the company […].
Why should you consider implementing an Employee Stock Ownership Plan in your company?
An Employee Stock Ownership Plan is nothing less than a powerful benefit that can serve many functions. Here are some of the benefits achievable just through programs of this kind:
- Retention of key employees – a valuable ESOP will make the best professionals more likely to stay with the company for the long term,
- incentive during recruitment – using the ESOP as a signing bonus will significantly increase the attractiveness of the job offer,
- Defer part of the salary – offering a package of shares to employees will make them willing to accept a lower salary. In this way, the company increases its value and better controls its finances,
- Branding – ESOP implementation is a great opportunity to highlight the company’s values. Partnership, cooperation and employee appreciation are desirable traits for companies in the current market.
- Tax benefits – a lot depends on the program variant chosen, but a properly structured ESOP will allow the company to apply preferential taxation to a portion of revenues (those realized in connection with the implemented share program).
How to implement an ESOP in your company?
Preparing a plan for granting shares to employees does not have to be a complicated and lengthy process, but there is no doubt that the whole matter should be thought through to the smallest detail – after all, the company’s shares are at stake. Before you start, it’s worth asking yourself some important questions:
What percentage of the company’s shares will be covered by the program?
Who will the program be intended for?
What exactly do you want to offer ESOP participants?
How do you want to divide packages among employees?
What criteria will need to be met to withdraw profits from the program?
How will ESOP impact the organization?
Types of ESOPs
Currently, we most often encounter three types of Employee Stock Option Plan programs: equity, option and phantom. We will devote a longer moment to each of them.
- Variant with capital allowances
In this option the company grants some ownership rights to ESOP participants in the form of shares. This means that the employee also has the right to share in profits (dividends) and the right to vote according to the conversion rate adopted in the company’s articles of association.
This option is the most opulent, with the employee becoming a proper shareholder in the company (even if the shares are a small percentage of the total).
- Variant with option rights
This type of program gives employees the right to buy shares in the company at a certain future date. This option is sometimes available in the form of a subscription – this spreads the cost and has an impact on employee loyalty. Longer time spent in the company entitles you to receive more shares.
- Variant with phantom authority
In this option, the employee does not receive actual shares, but retains the right to share in the company’s income, and more specifically to receive a profit distribution. The scope of the payment must be defined in detail. As a rule, phantom powers are granted in limited liability companies, where the equity power option cannot be used due to legal restrictions. Phantom entitlements do not have to end with profits alone – nothing prevents employees from being granted, for example, the right to vote or participate in shareholders’ meetings.
Summary
Business is changing, and with it the ways of employers to encourage employees to join this company rather than another, to stay with the company or take more responsibility for its performance. ESOP is a solution that can contribute to the company’s growth in many fields, and at the same time increase job satisfaction.
