Empowering Employees With Ownership

Introduction

Have you ever thought of turning employees into co-workers? Have you ever thought of how to keep your employees motivated for the long-run? Have you ever wondered what it would be like to give them a piece of the pie?

Well, there is a plan that has been documented for years that not only helps with succession planning of the businesses but also provides retirement benefits to the employees. It is known as the Employee Share Ownership Plan (ESOP), or, in some countries the Employee Stock Option Plan. 

Simply put, ESOPs allow employees to participate in ownership of the company they work for as the plan lets them buy company shares at a discounted price, offering them a stake in the company’s success. ESOPs are a powerful tool for motivating staff, increasing loyalty, and aligning employees’ interests with those of the business.

Here is how ESOPs work

The company sets up a trust and contributes either its own shares or money to buy company shares. These shares are then held in trust for employees and allocated after the vesting period based on factors such as seniority, compensation, or years of service. When employees leave the company, they can sell their shares back to the company/ trust at fair market value.

There are several ways companies can structure ESOPs for employee participation. They include:

• Directly issuing shares to employees
• Offering stock options (buy shares in the future)
• Providing shares as a bonus
• Profit-sharing plans that include shares

Key Elements of an ESOP

1. Separate legal identity: An ESOP has a separate legal identity from the employer company which vests in a registered trust.
2. Grant: Employees receive the right to acquire shares, often tied to seniority or tenure.
3. Vesting Period: The time between the date of offer by the company and the date after which an employee can exercise the option to purchase shares.Shares are allocated over time. Rights to these shares grow as employees stay with the company.
4. Exercise: Once shares are vested, employees can buy them at the agreed price.

Benefits of ESOPs

• Increased Employee Motivation: Employees become co-owners and are more invested in the company’s success.
• Raising Capital: ESOPs can help companies generate cash flow.
• Succession planning: Gives a clear and guided leadership and ownership transition.
• Retirement Benefits: Shares can serve as retirement funds for employees.
• Start-up Flexibility: Start-ups can allocate equity without the complexities of upfront payments.

ESOPs in Kenya

Kenya’s legal framework for ESOPs involves the Companies Act, Income Tax Act, Finance Act, and Capital Markets Authority (CMA) regulations. Publicly listed companies must register their ESOPs with the CMA and Kenya Revenue Authority (KRA). Private companies don’t need regulatory approval but must ensure they comply with corporate governance rules and have sufficient share capital for the plan.

Trust Deed: The Backbone of ESOPs

An ESOP is managed by trustees under a trust deed, which outlines the rules of the trust. Such trustees have a fiduciary duty to the employees which means that they must always act in their best interest. Key elements of a trust deed include:

• Eligible Employees: Who can participate in the plan.
• Share Pricing: The cost of shares and buy-back terms.
• Vesting: Conditions for earning shares.
• Exit Rules: How employees sell shares when leaving.

Legal and Tax Considerations

A company may only establish an ESOP if it has the corporate power to do so under its articles of association. Companies setting up ESOPs need to check if their Articles of Association allow for the plan and ensure they have enough authorized/issued share capital. ESOPs benefit from certain tax exemptions if registered with the KRA.

International ESOPs

Global companies face additional legal and tax requirements when setting up ESOPs in Kenya. They must comply with local laws on taxation, foreign exchange, data privacy, and employment contracts.

Conclusion

ESOPs are a smart way for Kenyan businesses to engage employees as it increases their commitment and provides for better compensation which is reflected in higher performance, increase in profits and hence the growth of their companies. With the right structure and compliance, these plans can benefit both employees and employers.

Reference links 

1. https://www.mossadams.com/articles/2021/05/esop-exit-strategy-with-tax-retirement-benefits 
2. https://www.nceo.org/articles/esop-employee-stock-ownership-plan 
3. https://www.businessdailyafrica.com/bd/lifestyle/personal-finance/integrating-employee-share-ownership-scheme-in-smes-3747770 
4. https://www.cytonn.com/topicals/topical-august-09-2015 
5. https://mman.co.ke/content/creating-bigger-pie-or-golden-handcuffs-employee-share-ownership-plans-kenya