Employee stock ownership plans, or ESOPs, are a powerful way of encouraging your employees to take an active interest in your business. They can powerfully impact your company for the better, although they’re not without drawbacks. Read on to learn more about ESOPs, and how they incentivize employees.
What Is an ESOP?
An ESOP is a plan where a company pays benefits to employees in the form of shares in the company. These shares can’t be sold off until the employee leaves the company.
When that happens, the company automatically purchases the employee’s stock. Employees can choose to receive that money in a lump sum, or in payments over time.
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Different ESOPs may be set up differently. Some companies may not distribute stock to employees until they’ve been with the company for a certain length of time. Others may distribute a type of stock that doesn’t come with voting privileges, which restricts employees from making key decisions (unless they buy normal stock in the company on their own, of course).
An Example
Sarah works as a veterinarian at a practice with an ESOP. She came on because she liked this investment option – although she had to work there for a year to get it, and it doesn’t give her voting rights.
Every year, her ESOP benefits buy shares in the veterinary practice. She can’t sell them until she leaves the practice. Because she can’t get out of her investment early, she knows she has to work hard to see the practice succeed.
Sarah is nearing retirement age. She’s excited for her shares to “vest”, meaning she’ll receive money for them (matching their value at the time of her retirement). The veterinary practice will directly buy her shares, then distribute them over time to other veterinary employees.
The Benefits
Employees like ESOPs. Giving veterinary employees stock in the corporation will encourage them to apply at the veterinary practice and stay there longer, so they accrue benefits. If a practice is having trouble recruiting and retaining veterinary employees, an ESOP can be a key part of a strategy to turn that around. ESOPs also often come with many tax benefits for employees and the veterinary practice.
ESOPs also encourage employees to care about the veterinary practice. Their investment is tied to investors’ confidence. If employees don’t care about the practice’s future, an ESOP is a powerful way of reminding them that everyone should be pulling together.
Limitations and Drawbacks
Despite their appeal, ESOPs have some serious limitations and drawbacks. Perhaps the most obvious limitation is that not all companies distribute stock. A sole proprietorship or other non-stock corporation won’t be able to provide employees an ESOP.
Stock is a measure of real ownership in a veterinary practice. When a practice sells stock to the public, they lose a certain amount of control over their practice to shareholders. Veterinary practices with ESOPs often cede some control to their employees, although nowhere near as much as they cede in a model like a worker-owned cooperative. Concerned practices can distribute ESOP stock that doesn’t give employees voting privileges.
In some rare but troubling cases, an ESOP may incentivize bad employee behavior. An employee might fail to blow the whistle on scandalous practices within the practice, for instance, because this would cause investors to lose confidence in the veterinary practice and cause the employees’ investments to lose value. Rather than addressing the bad practices and amending them, employees might allow the toxic elements within the practice to fester. To avoid this, it’s vital to maintain a culture of accountability and honesty within the veterinary practice.
For practices that dispense stock, an ESOP can be a valuable way to incentivize employees to sign onto the veterinary practice and work toward its success. ESOPs aren’t an option for every practice, and should be carefully considered before they’re implemented, but can transform a veterinary practice’s culture for the better.