Starting-up? Consider employee participation
Written by Constantinos Argyriades
Creating a start-up company comes with many challenges, one of which is how to remunerate employees. Employee share ownership plans provide an efficient way to recruit, retain and motivate employees as well as improve staff performance.
How do they work?
Employee share-ownership offers employee participation in the ownership of an enterprise as the term implies either by receiving dividends, or through the appreciation of employee-owned capital, or a combination of the two. While such schemes are not directly related to company profits, they are related to company profitability and so enable participants to gain indirectly from the company’s added value. Employee share-ownership can be both individual and collective and can take on many different forms. Typically a portion of company shares is reserved for employees and offered on privileged terms, or employees are offered options to buy their company’s shares after a certain amount of time, under favorable tax provisions. Alternatively, an employee benefit trust is set up through Employee Share-Ownership Plans (ESOPs), which acquire company stock that is allocated periodically to each employee’s ESOP account.
These schemes are divided into two main categories: the so-called ‘broad-based’ all-employee financial participation schemes and ‘narrow-based’ management-oriented schemes. Narrow-based schemes are typically executive incentive schemes aimed at monitoring management performance. Broad-based schemes, where all employees are eligible to participate in the schemes, tend to be more collective and may be directed towards increasing identification with the company rather than direct performance.
Cyprus has a framework of minor regulations for employee share ownership or share-based profit-sharing and developments so far have not been substantial. The capital market is not very developed and the majority of firms are privately owned, which leaves little scope for the development of full employee share ownership. However, it is expected that as a result of Cyprus being steadily established as a hub for start-ups1 there will be a favorable trend towards narrow-based schemes due to the requirement of start-ups to “collect” and retain talented employees and narrow-based schemes seem to fit perfectly to this goal.
i. Attracting top-quality staff;
Start-ups could utilize employee share schemes to attract good employees with a lower salary when cash flow is not so readily available. High quality more senior employees may expect equity incentives as part of their package;
ii. Retaining high performers;
Equally as important as the ability to attract top-quality staff is the ability to retain them. A share scheme is a great incentive as employees would think twice before leaving if they stood to walk away from something valuable. This is a great way of protecting a company from the risk of having strong performers poached by other firms;
iii. Employees having a stake in the performance of the business;
This could help change the way people think and behave. A person who owns a meaningful stake within a business is likely to act differently to someone who does not. Decisions made by employees with a stake in the company will align more with the objectives and goals set of the founding shareholders;
For further information or advice on this matter, please contact Constantinos Argyriades, Advocate in the Banking and Finance, Corporate Services Department (email: email@example.com, telephone number: +357 22 653156)
1 For more details on the strategy for Attracting Businesses for Activities or/and Expansion of their Activities in Cyprus please refer to the following link: http://mof.gov.cy/en/strategy-for-attracting-businesses/strategy