Sharing the Wealth
Steve Strauss, founder of www.theselfemployed.com, explains 3 models of employee ownership and how they can work for your small business.
Q: Business is good, thank you very much, and as a result I am considering sharing some of the wealth with my staff; the people who really have been instrumental in making this happen. My issue is, I don’t really know how to go about doing this. Can you help, MrAllBiz?
A: There are all sorts of ways to thank employees for a job well done. Of course financial rewards are the most welcome, but even then there are different ways to do this.
I have a buddy who is leaving tomorrow for a two week, all-expenses-paid trip for two to Costa Rica because he hit his sales goals this year. Or, you could offer a year-end bonus. You could have a contest where everyone wins something. You can give raises where applicable.
But the reader brings up a great idea that is far more common in the corporate world than the small business world: Consider giving employees an ownership stake in the business.
Before you scoff, think about it. When employees own even a few shares of the business, they
- Become very invested in the success of the business
- Become more entrepreneur than employee
- Think of work as something more than just a place to draw a salary
Studies show that employees who have a financial stake in the business are more conscientious, harder working, and happier.
There are three types of employee stock ownership plans that you could implement:
1. Employee Stock Ownership Plans (ESOP): ESOPs are similar to a 401(k) retirement plan but instead of having the retirement funds invested in outside stocks and a diversified portfolio, with an ESOP, the retirement funds are invested in the stock of the business. Payments made to ESOP plans, like 401(k) plans, are tax deferred.
Setting up an ESOP is not inexpensive. It can cost $10,000 easy, and the assistance of an attorney is almost a requirement. Essentially what you have to do is create a trust, appoint a trustee and an administrator, and make annual contributions to the employee’s accounts in that trust.
2. Stock Options: Back in the Internet bubble era (circa 1999 or so), we heard a lot about stock options. An employee would go to work at some hip e-startup with the promise of gobs of stock options. If the business took off, the options were a goldmine, but if not, they were worthless. The reason for that is how stock options were constructed and the nature of those businesses.
The way it would work for most small businesses however is that the business would award the employee the right (the option) to buy company stock at a specified price, a low price. The employee then has a certain amount of time to exercise the option. Once he or she does, they become a part owner of the company.
3. Employee Stock Purchase Plans (ESPP): ESPPs allow employees to buy stock through payroll deductions, at a discount of usually around 15%. The employee can then either sell the stock for a profit, or keep it for sale later.
No matter what option the business owners choose, it is true that a business owner will be giving up part of their equity in the business to create the employee stock ownership plan. The benefit of course is that they would be able to attract the best and the brightest of employees and create an incredibly motivated, dedicated workforce in the process.
Not a bad tradeoff, not at all.
Today’s tip: With hurricane season upon us, our friends at SCORE have a great small business “Hurricane Preparedness Checklist” that you might want to download. Check it out here.
Want to be part of this column? Then ask Steve a question! Visit his new site for TheSelfEmployed to get in touch with him.