ESOP communication: key ingredients for successful employee ownership
Employee Share Ownership Plans (ESOPs) are a powerful way to align the interests of employees with the success of a company. Employee ownership can foster a strong sense of ownership, improve employee engagement, and potentially enhance company performance. An ESOP’s benefits won’t be fully realised, however, unless employees understand how the scheme works and trustees are empowered to do their jobs effectively.
Managing employee expectations through communication
Coherent communication helps manage employee expectations, build trust, and promote buy-in, while well-trained trustees are essential to supporting the success of the scheme.
An ESOP can be exciting, but can also create confusion or misunderstandings if not properly explained. For instance, employees might expect immediate returns, direct control over company decisions, or better returns than what are typically seen.
It is therefore critical to ensure employees understand how an ESOP works. Often the first question asked by employees is “how and when will I benefit?” It is important to communicate the nature and timing of expected pay-outs, how they are calculated, and what influences pay-out value to manage these expectations. Linked to this is basic financial literacy training, ongoing communication, and an understanding of what drives business success.
Clarifying employees’ roles as owners is also crucial. Although employees have a financial stake in the company, they don’t get involved in day-to-day management. It’s important to clearly explain the company’s decision-making structure, showing how responsibilities are split between shareholders, the board, and management, and how the ESOP trust fits into this setup.
Building trust and achieving buy-in
Trust is an essential ingredient for an ESOP’s success. Employees must believe that the company’s leadership and ESOP trustees are acting in their best interest. Transparency, regular updates and open communication are the building blocks to achieve this buy-in.
Regular communication about the company’s financial performance and long-term strategic goals is important. This helps employees feel more invested because they can see the connection between their daily work and the overall success of the business. It also shows how their ESOP benefits are determined, helping them understand how their ownership interest is tied to the company’s success.
Communication and training
ESOP communication and training should also be tailored to employees’ specific needs, so the first step is understanding the current knowledge base of targeted scheme participants. The next step is to create a structured communication plan, which details the frequency, format, and content of training and communications, and the people responsible for delivering them.
While key communication will take place at scheme launch, communication about the ESOP should be ongoing and regular, using multiple channels such as newsletters, email updates, in-person meetings, and digital platforms to make information easily accessible. Content should cover how the ESOP works, what can be expected, who it will be managed by, and any related scheme news or updates. It should also explain the company’s goals and what makes it successful. Sharing information on key performance indicators, the company’s strengths, and industry trends can also help employees better understand the business and how they contribute to its success.
Financial literacy is often a key component of an effective communication program and should give employees a strong understanding of financial concepts such as shares, profits, and dividends.
Empowering ESOP trustees
While communicating with employees is essential, it’s just as important to provide ESOP trustees with specialised training. They have a fiduciary responsibility, which includes managing the ESOP’s investments, ensuring compliance with scheme rules, legal and regulatory requirements, and making decisions that directly affect the financial well-being of participants. The trustees are also in a unique position to help bridge the gap between management and employees and foster trust in the ESOP.
Trustee training should expand on the employee communications content, and cover trustee roles and responsibilities under the scheme rules, the Trust Property Control Act, and common law.
By communicating effectively and providing tailored training for trustees, companies can ensure that their ESOP is not just a B-BBEE initiative but a powerful tool for driving shared success.
Shaun Smit CA(SA), MBA – Director at Transcend Capital – With over a decade of experience in providing Employee Share Ownership Plan (ESOP) and B-BBEE transaction advisory to multinationals and South African corporates, Shaun Smit has a proven track record in crafting and executing ownership strategies aimed at fostering growth and sustained business success.
About Transcend Capital
Transcend Capital is a specialist Employee Ownership (ESOP) and B-BBEE Ownership transaction advisor, serving South Africa’s leading listed and multinational companies. Founded in 2005, Transcend Capital has successfully advised on over 200 transactions. The company utilises unparalleled expertise and experience to structure and implement value-adding ESOPs and B-BBEE transactions.
Shaun Smit
Director at Transcend Capital
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1. What is B-BBEE and why is it important?
B-BBEE is a key part of the South African government’s strategy to address transformation and remedy the inequalities of the historical Apartheid regime by giving Black people (South African citizens racially classified as African, Indian or Coloured) opportunities that were previously not available to them.
This is achieved by measuring and scoring enterprises initiatives regarding increasing Black ownership and management of enterprises and productive assets, achieving equitable racial representation in the workforce, developing skills of Black people, investing in, and procuring from, Black-owned enterprises, and making contributions to support socio-economic development of Black people.
Addressing B-BBEE is not compulsory, however an enterprise’s B-BBEE score/status will impact its ability to tender for and secure contracts. This is because an enterprise’s B-BBEE status impacts the B-BBEE scoring of its customers and because public sector work typically requires suppliers having a minimum B-BBEE status.
2. How is B-BBEE measured?
The B-BBEE Codes of Good Practice set out a balanced scorecard consisting of five elements: Ownership; Management Control; Skills Development; Enterprise and Supplier Development; and Socio-Economic Development.
Points are allocated to each of the five elements, with scoring outcomes based on achieved outcomes versus stipulated targets. An enterprise’s total points achieved then equate to a B-BBEE level/status. The B-BBEE levels range from “Non-Compliant” to “Level 1”.
Each B-BBEE Level is attributed a Procurement Recognition Percentage which enables customers to recognise a percentage of spend on goods and services from the entity as Black procurement spend, which positively impacts such customer’s own B-BBEE scoring.
Figure A. Generic B-BBEE scorecard
| Pillar |
Available Points |
| Ownership |
25 |
| Management Control |
19 |
| Skills Development |
25 |
| Enterprise & Supplier Development |
46 |
| Socio-Economic Development |
5 |
| Total |
120 |
Figure B. Generic B-BBEE level achievement and related procurement recognition level
| B-BBEE Status |
Points |
B-BBEE Procurement Recognition Level |
| Level 1 |
> 100 points |
135% |
| Level 2 |
≥≥ 95 but < 100 points |
125% |
| Level 3 |
≥≥ 90 but < 95 points |
110% |
|
Level 4 |
≥≥ 80 but < 90 points |
100% |
| Level 5 |
≥≥ 75 but < 80 points |
80% |
| Level 6 |
≥≥ 70 but < 75 points |
60% |
| Level 7 |
≥≥ 55 but < 70 points |
50% |
| Level 8 |
≥≥ 40 but < 55 points |
10% |
| Non-Compliant |
< 40 points |
0% |
3. Why is B-BBEE Ownership a critical part of B-BBEE strategy?
The Ownership element of the B-BBEE scorecard addresses ownership of enterprises by Black people, with empowerment and transformation being promoted through the ability of Black people to participate in economic returns from ownership as well as decision-making.
The Ownership element comprises a significant weighting (25 points) of overall points on the B-BBEE scorecard. In addition, Ownership is a “Priority Element”, meaning that if at least 40% of total targeted Black ownership is not achieved together with a minimum level of wealth creation for Black investors, then the B-BBEE status of an enterprise will be discounted by a one B-BBEE level penalty. It is therefore challenging and costly to achieve a strong B-BBEE status without addressing B-BBEE Ownership.
4. How can a multinational address B-BBEE Ownership?
There are various options for multinational companies to successfully address B-BBEE Ownership, including:
- Share ownership: This is the most common approach adopted by multinational companies and involves share ownership by Black investors in the local or foreign entity. Investors may include strategic Black partners, investment firms, Employee Share Ownership Plans (ESOPs), or broad-based charitable trusts;
- Sale of assets: Sale of productive assets (e.g. property) to Black investors with B-BBEE ownership being recognised based on the relative value of assets sold to value of the selling entity and the B-BBEE credentials of the investor; and
- Equity Equivalent Investment Programme (EEIP): multinationals with a global practice preventing a traditional sale of shares to Black investors may seek government approval to instead implement an EEIP. This entails making approved enterprise development and/or socio-economic contributions to qualifying beneficiaries, with B-BBEE ownership being recognised based on the relative value of such contributions sold to value of the entity
5. What is the Equity Equivalent Investment Program?
Multinational companies with a global practice preventing a traditional sale of shares to Black investors may seek government approval to instead implement an Equity Equivalent Investment Programme (EEIP). This entails making approved enterprise development and/or socio-economic contributions to qualifying beneficiaries, with B-BBEE ownership percentage being recognised based on the relative value of such contributions sold to value of the entity, and the period over which such ownership can be recognised based on the value of such contributions.
While potentially attractive, EEIP can prove lengthy and costly to implement, and relatively few have B-BBEE implemented.
6. Why are ESOPs a popular approach to addressing B-BBEE Ownership?
Employee Share Ownership Plans (ESOPs) have become an increasingly popular approach to addressing B-BBEE Ownership. With South Africa facing a skills shortage, employee ownership provides a means to attract and retain valuable talent, together with aligning interests of employees and shareholders, in addition to recognising Black ownership. ESOPs provide an ability to achieve true broad-based empowerment, in a way that rewards those that have played a part in achieving business success.
Although there was historically uncertainty regarding the feasibility of ESOPs, since the Department of Trade, Industry and Competition (DTIC) issued a practice note which confirmed employee ownership as a viable approach to achieving B-BBEE Ownership, ESOPs have been on the rise.
7. Do B-BBEE investors have to pay for their shares?
There is a common misconception that B-BBEE Ownership requires giving away shares. This is not correct, and most transactions involve B-BBEE investors acquiring ownership at fair value or at a discount to fair value.
A key aspect of B-BBEE Ownership is wealth creation for Black investors, so most often a B-BBEE acquisition discount is offered.
Funding of B-BBEE transactions depends on the type of B-BBEE investor. Established B-BBEE investors will often contribute equity in addition to external or vendor funding. Vehicles such as ESOPs or broad-based charitable trusts are most often vendor financed, with a proportion of dividends earned being applied to debt reduction.
8. How long does it take to implement an Ownership transaction?
The length of time required to structure and implement a B-BBEE transaction is dependent on the nature and complexity of the transaction, and can vary from 3 months to 18 months.
9. What are the roles of Black private equity funds in B-BBEE Ownership?
The B-BBEE Codes explicitly recognize black private equity funds as a legitimate vehicle for ownership. These funds provide a structured and viable method for achieving B-BBEE ownership when set up correctly. They should operate like traditional private equity funds, with an independent general partner managing third-party funds.
However, caution is required, as these structures are sometimes misused. Abusive practices involve using private equity funds as mere wrappers for personal shareholding rather than genuine third-party investment. Such misuse is considered fronting and undermines the intent of B-BBEE.
When properly structured and independently managed, Black private equity funds can be an effective means of achieving sustainable B-BBEE ownership.
10. What are the Public Interest Competition Commission requirements when considering a merger or acquisition?
When considering the approval of a merger or acquisition, the competition authorities assess the impact of the merger or acquisition on the public interest. In doing so, the competition authorities considers whether the merger has a negative impact on any of the following economic aspects:
- Employment;
- The promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers;
- A particular industrial sector or region;
- The ability of small businesses or firms controlled or owned by historically disadvantaged persons to become competitive; and
- The ability of national industries to compete in international markets.
The Competition Commission require that parties to the merger commit to measures that remedy any expected negative impact on the above factors. Most often this includes a requirement around implementing an Employee Share Ownership Plan (ESOP).
About the Author
Shaun Smit CA(SA), MBA – Director at Transcend Capital – With over a decade of experience in providing Employee Share Ownership Plan (ESOP) and B-BBEE transaction advisory to multinationals and South African corporates, Shaun Smit has a proven track record in crafting and executing ownership strategies aimed at fostering growth and sustained business success.
About Transcend Capital
Transcend Capital is a specialist Employee Ownership (ESOP) and B-BBEE Ownership transaction advisor, serving South Africa’s leading listed and multinational companies. Founded in 2005, Transcend Capital has successfully advised on over 200 transactions. The company utilises unparalleled expertise and experience to structure and implement value-adding ESOPs and B-BBEE transactions.
Read More
10 compelling reasons for Employee Ownership
Employee Share Ownership Plans (ESOPs) are a powerful tool to address some common business challenges. Having advised on a multitude of ESOPs across various industries, we have seen a number of benefits shine through. These include: 1. Companies attract better quality...
Understanding BEE Ownership: Your Top Questions Answered
Transcend Capital’s client base mostly consists of multinationals operating in or entering South Africa. Many are familiar with Broad-based Black Economic Empowerment (B-BBEE) however I frequently get asked questions, mostly about B-BBEE ownership: What is B-BBEE and...
Trade tensions: Can employee ownership schemes create common ground?
The current tensions between the United States and South Africa run far deeper than any single issue. Disagreements over South Africa’s stance on Gaza and other foreign policy elements have strained diplomatic relations and stirred trade conflicts. Despite these...