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Media - The ESOP file An information circular on a workplace option for the new economy -- Employee Share Ownership Plans. Contents: FOR MORE INFORMATION CONTACT: ESOP Builders Inc. is an Ontario-based firm specializing in the design and implementation of innovative employee ownership solutions. Retain and repatriate Canadian high tech talent Over the past few years, separate lobbies have pressed the federal Minister of Finance to take action to stem the brain drain of knowledge workers to the United States. Trade organizations representing compensation planners and the high technology industry called on Mr. Martin to include changes in the 1999 and 2000 Budgets to encourage employee stock option plans (ESOPs) as a tool to attract and retain skilled workers. Perry Phillips, president of ESOP Builders, has previously led the charge to Ottawa with a delegation from the ESOP Association Canada. Mr. Phillips says the critical shortage of knowledge workers and the growing trend for high tech workers to accept jobs in the US has highlighted the need for the federal government to take fast action on competitive compensation measures such as ESOPs. "Stock options and the potential for capital gain are a huge draw for skilled high tech workers and Canada lags behind the US in making them available. We lag behind because our tax environment is not conducive to putting them in place." Mr. Phillips points out there are a number of good reasons that make ESOPs especially attractive in today's economy. "In our global economy, productivity has to be a number one issue. ESOPs boost employee motivation and productivity and as a result, profitability. Participating employees act like owners because they are owners." The second voice to speak up for ESOPs, was a unified representation from the technology and manufacturing sectors. In a joint communiqué to the Minister of Finance, the Information Technology Association of Canada (ITAC), the Canadian Advanced Technology Association (CATA Alliance) and the Alliance of Manufacturers & Exporters of Canada (AMEC), called for a progressive treatment of stock options to plug the brain drain of highly skilled Canadians. "We strongly believe there is a solution that will immediately provide Canada with the competitive advantage needed to stem the brain drain. We believe that the time is right for a creative, world-leading approach to the tax treatment of employee stock options and Employee Stock Ownership Plans... Wider deployment of stock options means that employees in technology-intensive companies have become risk-takers and as such, they are increasingly motivated by capital gains, not income." As the architect of a number of successful ESOP plans in Canada, Phillips can cite real life benefits of such programs. A case in point is Castek Software Factory Inc., a Toronto-based information technology firm specializing in the design and delivery of strategic business software solutions, primarily for the financial services sector. Castek's ESOP has been a determining factor in recruiting and retaining key personnel. The staff churn rate is under 10 percent, which means the plan has helped build loyalty within the firm and increased the commitment from staff. Seventy-five per cent of Castek's eligible employees are shareholders and the employee satisfaction index is at 80 per cent. "We have a number of ESOP success stories in Canada," says Phillips, "but the real wealth of information we draw on is the US-experience." The popularity of ESOPs in the US has grown steadily since the late 70s, driven by the lobbying efforts of key legislators with a philosophical bent to broaden share ownership and by a long tradition of personal shareholding as a means to building individual wealth. American ESOP legislation is federally driven and encourages both employers and employees through tax deductions and direct tax subsidies. In Canada, ESOPs are provincially driven with virtually no federal incentive. There are some incentives to employees through provincial tax credits, but no encouragement to business owners. "Looking back to when ESOP legislation was introduced in the late 70s, and certainly, tracking the rate of activity since then, the numbers suggest there is a difference when the federal government provides incentive for business owners. Three years after provincial legislation was put in place, there were 50 ESOP formations across Canada. In the same time frame in the US, three years after federal legislation, there were 2,500 ESOP formations." More than coffee brewing at Starbucks. In the fast food industry where turnover rates of the predominantly part-time staff are as high as 250 to 300 per cent, Starbucks is different from almost all the others. The coffee chain's turnover is a fraction of the industry norm. The difference? Starbuck's part-time employees "partners" are eligible for the company's stock option plan. A whopping profit for AVIS employees. An ESOP with over 13,000 employee participants turned AVIS from a culture of uncertainty, where there were five turnovers in ownership in an 11-year time frame, to one of positive focus. Within three years of introducing the ESOP, AVIS was included in "100 Best Companies to Work for in America" and cited by Fortune as a corporation to model. Employee morale and participation drove profits steadily upward. When the company was sold in 1996, employee shareholders netted three-times the value of their shares. Possibility thinking. According to Phillips, ESOPs are a blend of philosophy and pragmatism. "There are the very real benefits for employees and employers. But it's also interesting to consider how ESOPs are right for the times. "The philosophical position on ESOPs has much to do with a fundamental shift in thinking and in workplace culture as we move towards the millennium. Unquestionably, we are entering a new economy, one of individual opportunity and individual responsibility. The Nexus generation in particular -- those born in the 60s and 70s -- see the workplace as their community. This is contributing towards a shift in attitude towards compensation and career choices. There are wholesale shifts in attitude about the ethics of business. At a time when the wage gap is becoming a chasm, ESOPs are a powerful lever to share wealth and ownership and to give a greater cross-section of individuals the opportunity to supplement their basic wage." FOR MORE INFORMATION CONTACT: ESOP Builders Inc. is an Ontario-based firm specializing in the design and implementation of innovative employee ownership solutions.
BACKGROUND Definition ESOP [ee-sawp] an employee share ownership plan, a formal plan which allows qualifying employees to purchase shares in their employer-company, with or without the financial assistance of the company. Employee ownership can range from 1% to 100% of the company. As they become owners, employees share in the risks and rewards that accrue to the company. Purpose
According to a 1986* Toronto Stock Exchange comparison of ESOP and Non-ESOP public companies:
Position -- Politically correct Conservatives are in favour of ESOPs because they help build capitalists. Liberals like them because they share the wealth. In 1993, the federal NDP had all party support for an ESOP bill. It died on the order paper on dissolution of parliament.
LEGISLATIVE BACKGROUND Current Canadian ESOP legislation:
Quebec was the first province to bring in quasi-ESOP legislation, in 1979, to provide tax relief to investors and to create capital pools to finance Quebec businesses. Likewise, British Columbia, Ontario, Nova Scotia and Saskatchewan have encouraged employee ownership with tax incentives for the past 10 years. The US Congress first enacted tax measures to encourage employee stock ownership in 1974. Today there are 11,000 ESOPs in place in the US. There are no comparable figures for Canada, but best estimates put the number of ESOPs or ESOP-type plans at a few hundred. Comparative legislation
FOR MORE INFORMATION CONTACT: ESOP Builders Inc. is an Ontario-based firm specializing in the design and implementation of innovative employee ownership solutions.
PROFILE Perry Phillips: possibility thinker. Perry Phillips saw it coming -- a shift in business ownership that made sense. A blend of philosophy and business acumen prompted the business valuator to found ESOP Builders Inc. nearly five years ago, to specialize in the design and implementation of employee share ownership and stock option plans. "From the pragmatic point of view, ESOPs address a number of key issues in today's workplace, namely: attracting and retaining key employees, productivity and competitiveness, succession planning for family-run firms. Participating employees act like owners because they are owners. "The philosophical position on ESOPs has much to do with a fundamental shift in thinking and in workplace culture as we move towards the millennium. Unquestionably, we are entering a new economy, one of individual opportunity and individual responsibility. The Nexus generation in particular -- those born in the 60s and 70s -- see the workplace as their community. This is contributing towards a shift in attitude towards compensation and career choices. There are wholesale shifts in attitude about the ethics of business. At a time when the wage gap is becoming a chasm, ESOPs are a powerful lever to share wealth and ownership and to give a greater cross-section of individuals the opportunity to supplement their basic wage." With close to 30 years experience in business valuations -- a critical path in the structuring of any share offering -- Phillips watched the popularity and success of ESOPs grow dramatically in the US. He holds a passionate belief in the ethics and efficiencies of such plans and has worked determinedly to raise the profile of ESOPs in Canada. Phillips is a founding member of the ESOP Association Canada, a self-financed lobbyist at the federal government level and a magazine contributor and regular speaker at major ESOP forums. ESOP Builders has successfully implemented ESOPs at a number of small and medium sized Canadian firms. FOR MORE INFORMATION CONTACT: ESOP Builders Inc. is an Ontario-based firm specializing
in the design and implementation of innovative employee ownership solutions.
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