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What’s it: A share-ownership scheme is an incentive to employees and management by giving them the right to purchase stock in the company they work for. It could be an employee stock ownership plan (ESOP) and a management stock ownership plan (MSOP). They buy it at a certain price and on a certain date. Such schemes aim to motivate employees and management to perform better, which in turn increases their well-being.
Why does the share-ownership scheme matter?
Share-ownership schemes are important for motivating employees and management by directly linking their performance to their well-being. It links their performance, the company’s performance, and its stock price.
Under this scheme, employees and management become shareholders in their company. When they perform well, the company can achieve sustainable competitive advantage, driving up its share price and ultimately increasing their wealth.
Thus, employees and management are not only concerned with monthly salaries. But, they are also motivated to increase the price of the shares they own. Therefore, they should strive to be more productive and perform better. By doing so, their company can grow faster and be more profitable.
When the company grows and is profitable, its shares will become a target for investors. As a result, the price goes up.
Then, because the company’s stock price rose, the wealth of employees and management also rose. So, they don’t just enjoy a monthly salary. But, they also have more wealth from the rising stock prices they hold.
How does the share-ownership scheme work?
Share-ownership schemes may be similar to profit-sharing schemes. Both aim to motivate employees by linking their performance to their incentives. Both need their hard work to support better company performance. So, in the end, they enjoy their toil.
However, the difference lies in the incentives used to motivate employees. Share-ownership schemes work through ownership interests in the company, where their wealth increases when the company’s share price rises. Meanwhile, the profit-sharing scheme works through recorded profits, where the company will distribute part of the profit as a bonus to them.
A share-ownership scheme gives employees the opportunity to buy company shares. It is a way to compensate and motivate them in addition to salary and bonuses. This scheme is common for public companies, whose shares are listed on the stock exchange.
How it works may vary from company to company. But, in general, the company will give employees the right to buy company shares at a certain price during a certain period.
Stocks are usually offered at a discount, i.e., lower than the expected future price. But, it may be higher than the current market price. Such price offerings aim to provide an incentive to work hard to increase the company’s share price in the future.
Then, employees can buy company shares through cash contributions. Or it is by setting up a trust fund.
For example, employees who contribute to the program buy through pay deductions when enrolling. They have to decide what percentage of salary they want to cut. Once the funds are accumulated, it is then used to buy shares in companies in their name.
What are the advantages of the share-ownership scheme?
Motivating factor. Employees are motivated to give their best for the company. They strive to be more productive and perform better. Thus, the company continues to excel, grow and be profitable. As a result, the stocks they hold continue to rise in price, and their wealth grows.
Higher involvement. Employees feel closer to the company because they have an ownership interest. As a result, they are more involved in the business – not only as workers but also as shareholders, which is important for continuous improvement.
Performance-based compensation. Through this scheme, the company seeks to link employee productivity with their compensation. When they are more productive, they can get higher compensation. It’s not like a salary, where they still get a fixed nominal regardless of whether they are productive or not.
Reduce turnover. This scheme can be a tool to increase employee retention. Those who participate in this program will stay longer to get a higher return on their shares.
Alternative to salary. New companies can use stock ownership programs as an alternative to paying their employees. They replace part of the salary with ownership interests. Thus, more profits and capital are available to support future growth.
Reduce conflicts of interest. Employees have an interest in getting high compensation. On the other hand, shareholders are interested in getting large dividends. Therefore, when more compensation to employees, less profit is available to distribute dividends to shareholders.
And, share ownership schemes can be an alternative to compromising these two conflicting interests. Companies can compensate employees more without sacrificing profits.
Increase working capital. Lower cash compensation can reduce pressure on cash flow. As a result, the company has more working capital available – not spent on salaries – to sustain business operations.
Investment. Owning company stock allows employees to invest in the long term. As a result, their wealth increases as the company grow.
What are the disadvantages of the share-ownership scheme?
Speculative. The company’s stock price may rise due to speculative activity. Stock investors may buy stocks for short-term gain. As a result, stocks may rise in the short term but not in the long term.
In other cases, investors may have better options than the company’s stock. So, even if the company performs well, it doesn’t attract them to buy. As a result, its share price is difficult to rise.
Decreased wealth. The stock price may go down. As a result, employee wealth goes down. It can increase psychological stress and employee turnover, demotivating them and lowering company performance.
Excessive financial expectations. Employees may have excessive expectations for the stock they hold. So they cut their salaries considerably to get more stock, hoping their wealth would increase soon.
It can lead to acute disappointment if their expectations are not realized. After all, stock prices are determined by the market, not them. And, often, markets don’t work the way they expect.
Ineffective to motivate. Some employees viewed the program as having no value to them. Even though they own shares, they cannot influence the share price. Instead, the price of the shares they hold is determined by external parties, namely stock investors out there.
Administrative costs. Running this program involves a complex and costly process. It does not only consume costs to draft and get share scheme approval. But, it also consumes costs to manage the program. Such costs are much higher than the costs involved in other financial rewards such as profit sharing and performance-based bonuses.
