Human Capital & Careers

Global ESOPs: Putting the Pieces Together

Global employee share ownership programs present a complex jigsaw puzzle of administrative hassles and regulatory burdens.
Martin BaccardaxMarch 28, 2002

There once was a day when running an employee share ownership program (ESOP) seemed like a straightforward exercise. But as managers at a growing number of companies are learning, ESOPs are anything but straightforward — particularly when they are rolled out to employees around the world.

Indeed, the more global a company, the more complex its ESOP. From taxation to accounting, the lack of international harmonization makes it close to impossible for companies to offer share ownership to all staff efficiently.

“[ESOPs] can be a pain in the neck, there’s no question about that,” says Charles (Chip) Goodyear, chief development officer of BHP Billiton. Since the mining giant was formed last year following a merger between BHP of Australia and Billiton of the UK, it’s been running ESOPs in which over 40 percent of its 60,000 employees are participating. “The regulatory issues and the pension and tax issues are the most complicated,” says Goodyear. “When you’re offering an ESOP to people in places as diverse as Chile, the UK, Australia and South Africa, it’s the market and the location that you’re issuing into that make it complicated.” Then there are a host of other issues, not the least of which are company-wide communication policies that keep employees fully informed of changes to their ESOP.

So why go through the hassle? “It’s important to align our shareholders and our employees when they think about the business decisions of the company,” says Goodyear, who was CFO of BHP prior to the merger.

Indeed, the potential benefits of employee share ownership are impressive. Consider an index developed by Watson Wyatt, a benefits consultancy that studied nearly 700 companies in North America and Europe in 1999 and 2000 to see what sort of impact human resource practices in general have on shareholder value. “One trend was that share ownership [by employees] seemed to increase overall market value [of the company] by up to 4 percent,” says Richard Cockman, a senior consultant at the firm. “That’s not to be sniffed at.”

Spreading Out

And though the allure of employee share programs has waned along with the global stock markets over recent months, some companies are still keen to extend their share ownership plans beyond the senior ranks of managers to more parts of the business. According to Watson Wyatt, for example, 64 percent of FTSE 100 companies in the UK either have or are considering company-wide plans.

The good news is that for companies willing to live with the headaches, there’s plenty that they can do in terms of administration and implementation to make a global ESOP run smoothly. “Often companies have core design principles that they would like to follow,” says Duncan Smithson, a senior consultant with William M Mercer, another benefits consulting firm. But, he adds, this doesn’t stop them from allowing local offices to build on those principles and tailor an ESOP to suit the needs of a country or region.

Before that can happen, however, there are plenty of issues that need to be considered. John Meehan, international business development manager at Computershare, a technology and consultancy firm specializing in ESOPs, says that companies should set aside six to nine months to prepare for a launch, carrying out what he calls “due diligence” within each jurisdiction where an ESOP will be run. After that, he says the timing of an ESOP’s rollout needs to be planned carefully. Should a company introduce a plan to all of its employees at the same time, taking a big bang approach? Or is it better to start out slowly, with a piecemeal roll-out?

There’s no standard blueprint — every company’s decision will be determined by the complexity of both its business and the plan, the willingness of senior management to provide support and the readiness of staff to embrace share ownership. Even so, Meehan warns that the big-bang approach can be unduly complicated. “A lot of companies don’t realize this but sometimes it’s better to take a phased approach and concentrate on rolling out the program in the countries with the most employees,” he says. “It takes off some of the pressure.”

Another aspect of ESOPs that needs to be addressed is the tedious administration involved. For this, Meehan suggests group headquarters give local offices substantial autonomy. As he sees it, “data processing, both collection and output, are best handled locally,” and can even be outsourced.

That, in turn, will free up senior management at head office to focus on what is perhaps the most important element of a well-run ESOP: communication. “It’s absolutely crucial if you want to make it a success,” says Smithson of William M Mercer.

Good communication starts with how the plan is marketed to staff internally. For Benjamin Cohen, CFO of Accor, the French hotel group, the reason why is clear: “We want to increase our employees’ affinity with the group.” So ever since it launched a global ESOP for top and middle management at most of its offices in 1999, staff receive regular information about the program, including a small, easy-to-read booklet with FAQs and a glossary of investment terms. The ESOP has been dubbed Accor en actions, a clever play on words roughly translated into English as Putting Accor into action (though actions also means shares). Currently, more than 25 percent of 80,000 employees in 23 countries are participating in Accor en actions, owning about 2 percent of Accor’s outstanding share capital between them.

Long after a plan is launched, communication still requires head office’s full attention, says Suzanne Mallion, vice-president of marketing at the international stock plan services division of Salomon Smith Barney. This can be done with regular feedback sessions between staff and the plan’s administrators. And it’s not a bad idea for CFOs to attend those meetings every now and then. “If you’re hearing repeated questions or themes from your plan’s participants, it’s likely these concerns reflect something going on throughout the company and can be addressed the next time an information packet is sent out.”

But caution is also needed. Provide too much information, and a company can fall foul of the law. In some countries, notably the US and the UK, it’s illegal for companies to provide advice to share plan participants. But offer too little information, and a company can be accused of misleading employees. “It’s difficult to advise,” says Accor’s Cohen. “We give the same full information that we give to all our shareholders, but it is a personal decision to participate and it’s not for us to interfere with that decision.”

It’s a fine line to tread indeed. Yet it’s clear that many companies reckon such concerns are relatively minor when weighed up against the benefits that an ESOP can bring — as long as all the pieces are in place.