By Shaun Smit – 25 August 2023
Why are ESOPs in South Africa relatively uncommon?
Moneywebmidday interview with Jeremy Maggs (JM)- Why ESOPs remain relatively uncommon in SA?
Employee Share Ownership Plans (ESOPs) in South Africa remain underutilised, despite their potential to enhance employee engagement, align business interests, and achieve BEE ownership goals. Shaun Smit of Transcend Capital delves into the complexities, challenges, and benefits of ESOP implementation and offers insights into creating sustainable employee ownership models.
JM: Let’s talk about ESOPs, which remain relatively uncommon in South Africa. An ESOP is an employee benefit plan that enables employees to own part of or all of the company they work for.
JM: Under the current BEE scoring framework, there are no points awarded exclusively for implementing an ESOP. I want to give you a view now from Shaun Smit (SS), a director at Transcend Capital, who works with C-level executives of multinationals and South African companies in structuring and implementing optimal and sustainable employee share plans.
JM: Shaun, why do you believe that ESOPs remain relatively uncommon in this country, particularly outside of the mining industry where they are more prevalent?
SS: It comes down to uncertainty around the benefits and potential costs of implementing an ESOP. Business leaders or owners look at this from a cost-benefit perspective. There are potential benefits in employee engagement, increased business performance, better attraction, and retention. But the question is, how successfully can we achieve these outcomes? What kind of expectations will the employees have? In a poorly implemented ESOP, it can even damage the employee-employer relationship.
SS: Uncertainty around financial benefits and BEE benefits has often resulted in businesses not implementing an ESOP.
JM: Shaun, I’m assuming that critical to success is government incentive and also better policy direction. To what extent is that either happening or not happening in this country?
SS: There’s very limited government incentive for ESOPs, mainly from a tax perspective. In other countries, there are clear tax benefits for implementing an ESOP, usually for the company itself. In South Africa, although some limited forms of ESOPs provide tax benefits, most ESOP structures don’t offer significant tax advantages.
SS: There has been mixed policy regarding ESOPs mainly from a BEE perspective. BEE has been the main driver of ESOP implementation in South Africa. The BEE codes do explicitly set out that ESOPs are a way that you can achieve BEE ownership outcomes, but they can be interpreted differently by verification agencies, the DTI, and the BEE Commission. This uncertainty has slowed down ESOP implementation.
JM: Is that a difficult hurdle to overcome? Are radical changes needed to current BEE codes?
SS: I don’t think radical changes are needed. To drive greater employee ownership implementation, having dedicated points or more points available specifically for ESOPs would improve ESOP implementation. If there was more certainty around the outcomes of ESOP implementation, that would make business owners or business leaders less nervous and more likely to actually move forward with ESOP implementation.
JM: For any business concerned about implementing an ESOP, where’s the starting point? What advice would you give based on your experience?
SS: There’s often apprehension and misconception about employee ownership. The starting point is to clearly understand BEE rules, structural options, and benefit options for an ESOP. Testing these against your own business can clarify whether ESOPs make sense before making a decision.
SS: The analysis and planning stage is important and will be very valuable for any business thinking about implementing an ESOP.
JM: Thank you for the insight, Shaun Smit from Transcend Capital.