Construction Company-Employee Share Ownership Plans and Profit Sharing

Written by Mark O’Rourke, CPA, CA; MNP LLP

January 2022

Image: irstone/123RF

It’s no secret Canadian construction companies are experiencing change at an unprecedented pace – fueled by almost daily shifts due to the impact of Covid-19, compressed margins, an aging workforce and bidding processes.

At the same time, a seismic demographic shift is taking place. Millennials will soon overtake baby boomers as the largest generation in the Canadian workforce, with qualities and work styles that may differ from their predecessors. This generation is demanding a clear career path, a more collaborative work environment, more information and more work/life balance, and this trend will only continue.

In fact, the battle to attract and retain capable, motivated people – of any age – remains a challenge, even in today’s complex environment. This is where employee share ownership plans (ESOPs) and profit sharing can come in.

The road to employee ownership

There are a number of concerns common to construction business owners looking to implement an ESOP, including challenges such as:

How to retain the brightest and best people? The need for capable people who can bring value to the business is more important than ever to ensure a strong bench strength is maintained.
The want to share some profits with their teams in a way that makes sense, tied to the real performance of the company. How is this determined?
The need to develop more training time and invest in upcoming leaders to increase the likelihood of them staying with the company.
All of the goodwill in the business is in the people, and so it’s possible employees could buy all or parts of the company one day. How is this done in a way that makes sense and ownership retains control?

Employee ownership programs can be autonomous or combined with profit-sharing programs.

3 key questions to ask – and answer

When planning their future and the future of their business, owners should consider the following:

How are profits shared with employees?
How are more ownership and value shared with employees?
How is future growth shared with employees?

The answers to these questions will vary depending on the business and owners’ objectives, but foundational to any situation are a few key considerations:

What are the objectives of profit sharing or an ESOP? For example, is this an attempt to attract new talent? To keep strong employees from moving to competitors? To transition out of the business?
Would profits be shared with all employees or just a certain group? Some companies only want to share with their key employees, while others prefer to share with all their employees.
How closely should profit sharing be tied to corporate performance? Are the leaders willing to develop a profit-sharing system that is closely tied to specific performance areas or is the sharing more subjective?

It is possible to combine these outcomes and develop a system that answers all the questions, but any solution, no matter how complex or simple, should specifically address these questions.

Tips for a successful transition

Employee ownership programs can be autonomous or combined with profit-sharing programs. Generally, they allow for all or only certain qualified employees to become direct owners in the company. Critical factors which lead to successful ESOPs include:

Having a culture or being willing to develop a culture whereby decision-making is decentralized and management is engaged.
Creating an ownership structure which allows for employees to share in the growth of the company without owners needing to give up control.
Creating a program that acts as a catalyst to drive corporate growth and provides employees with the ability to say, ‘We are doing this together,’ instead of, ‘I am doing it for management.’ This is a major benefit of employee ownership.
Developing a flexible ownership structure from the outset that can evolve with the needs of the business and the owners. In this way, ownership could eventually shift entirely to employees along a clear, pre-determined plan.
Having a system and methodology for how employees will be able to obtain their shares. Will they have to pay full market value for such shares or a discounted value? Will the full purchase be made immediately or be done over time? Will a bonus system be used to help employees pay for their shares or do they have to come up with the funds themselves? Are the owners willing to help employees buy in or not?
Having an educational program in place to help employees understand how the plan, and ownership, work. For example, not all employees are able to distinguish clearly between their future rights as minority owners and simply remaining good employees and focusing on their day-to-day responsibilities.

Both profit and ownership sharing programs have enormous value in the right situations. Spending the time upfront to plan and clarify the needs of the business, its owners and employees will go a long way to help develop a structure and implementation plan that makes the plan successful.