Workplace flexibility alone no longer works as a talent acquisition tool simply because it has become the new baseline for employees, who now increasingly expect to be able to work remotely and have some fluidity around their working hours. Salary and compensation are still the main differentiators. In fact, a McKinsey study found that inadequate compensation was the second-highest reason for people quitting their jobs between 2021 and 2022 — and many of those who quit actually re-joined the labor force soon after for a better, higher-paying job.
In this context, giving employees some equity would add value to benefits packages or be an alternative to higher salaries. Employee ownership is one answer to attracting talent and reducing churn. Research by Rutgers University and the University of Massachusetts Amherst found that share-ownership schemes are not only good for driving employee productivity but they can also help firms better weather recessions and economic crises.
With the unprecedented rate of employee turnover that saw over 47 million people call it quits in the U.S in 2021 alone, employee share ownership could tip the scales in the favor of a business if it is implemented in the right way.
A Fresh Look at Employee Ownership
A Cardiff University study found that share schemes sometimes fail to bring about change in employee attitudes and behaviors simply because the stakes for staff are often too low. Not only that, but some of the share-option schemes can be restrictive in terms of their vesting period, and the associated risk or real decision-making power employees have as share owners.
This may explain why some employees still decide to quit at companies with share schemes rather than stick around for potential earnings in a distant future.
Conversely, when ownership is coupled with employee empowerment, it can really transform and re-energize the workforce. This means giving employees a say in how the organization works and fostering trust and better collaboration between managers and employees. A study by professors Blasi, Freeman and Kruse found that share ownership combined with employee empowerment incentives more effectively curb turnover than either approach alone.
Share ownership isn’t reserved for startups and scale-ups, either. The National Center for Employee Ownership found that nearly one in 10 Employee Share Ownership Plans (ESOP) are launched by publicly owned companies — and Employee Stock Purchasing Plans (ESPP) are almost exclusively offered by public companies.
Launching Your Share Ownership Scheme
Despite the benefits of employee share-ownership schemes, between 2002-2014 only 18.7% of private-sector employees held stocks in their companies (this number grew to 45% if other profit-sharing initiatives were included). Employers can use this low take-up to really stand out in their sector, but before launching a share scheme, leaders need to think about how to make it the most effective for their business and employees. Here are some things to consider:
- Tax incentives: The U.S. Congress has enacted tax incentives for companies offering ESOP to their employees but these can differ by share plans. Contributions are tax-deductible up to 25% of covered payroll.
- The make-up of your workforce: A McKinsey study found that different pools of workers give priority to different types of benefits. Looking at demographics and other factors can inform your decision on whether to allocate shares based on performance or to link shares to employee tenure.
- Decision-making power: How much would employees get and what would that look like in practice? This is a critical question because the absence of decision-making power is one of the main reasons employee share plans fail.
- Conditions under which employees can cash in: The financial rewards of share plans are often far off in the future and tied to business performance, which employees have no control over. This is another reason they can be ineffective. Alternatively, employees could cash in some of that money earlier based on certain KPIs they could control.
- Safeguarding measures against potential losses: If your employees don’t have the capacity to invest, perhaps a stock appreciation rights (SARs) plan where they don’t have to buy shares in order to benefit from their increases in value can be an attractive option.
Giving Power Back to Employees
In recent years, employee turnover has become a pandemic in itself and no business or industry is exempt. However, executives who really want to avoid serious staff shortages in the future can change how they think about talent retention. If cash is still king, share ownership plans may be more lucrative and meaningful to your employees. It enables leaders to help them de-risk their investments while still giving them a chance to profit at different milestones of their employment. It can mean the difference between having a thriving workforce or being stuck in a perpetual cycle of hiring.