How do employee share ownership plans fit into a full suite of savings options?

The bank’s ESOP is voluntary, allowing employees to elect to make payroll deductions to purchase Scotiabank shares, which can be held in either a registered retirement savings plan, a tax-free savings account or a non-registered account. Employees contribute within a set percentage of their eligible earnings after tax with Scotiabank matching at a set percentage. While employee contributions are automatically vested, the employer match, which is either held in an employee profit-sharing plan or a deferred profit-sharing plan, are vested after two years of participation.

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Scotiabank sees high participation rates: 80 per cent of Canadian employees participate in the plan and 95 per cent of this group contribute at the maximum level and receive the bank’s full match.

Holistic approach to financial well-being

Employee ownership is known to boost productivity, improve company stability, reduce turnover and improve employee retirement savings, according to the National Center for Employee Ownership, a U.S. non-profit organization.

ESOPs provide employees with a financial stake in their employer, allowing them to materially benefit when the company does well. But regardless of whether a plan sponsor offers an ESOP as an incentive to retain key talent or as a succession planning strategy, education is often necessary to ensure employees understand the benefits and risks of these plans and to position share ownership relative to other employer-sponsored savings vehicles.

Scotiabank’s ESOP, which has been around since the 1980s, fits into its holistic approach to financial well-being, says Cabral. In addition to the ESOP, the bank has a DC pension plan — in which Scotiabank makes employer contributions even if an employee opts not to contribute — and an optional group RRSP.

Read: Head to Head: Should the U.S. ESOP structure be brought to Canada?

“Our sales pitch to employees is [the ESOP] is a great way to augment your short- and long-term savings goals and participate in the success of the bank.”

In its plan member communications, Scotiabank highlights that it has paid a yearly dividend to shareholders for more than 150 years, so participation in the plan serves as a “good source of income.” It also underlines the flexibility of the plan: employees can use their ESOP savings to fund their retirement or withdraw funds during their working years to buy a home, renovate, pay for their wedding, put towards their children’s education or achieve other financial goals.

“We call all this out in a portal we have for employees . . . so it’s positioned in a manner that you choose how you use the ESOP; we won’t dictate it for you,” says Cabral.

Educating ownership

Education is particularly important for employees at private companies, says Joanna Phillips, vice-president of ESOP Builders Inc., an employee share ownership consultancy.

She works exclusively with privately owned companies and says her employer clients’ interest in offering an ESOP is nearly evenly split between attraction and retention and succession planning. For private companies looking to establish an ESOP, the first step is contracting business valuators to establish the fair market value of the company, which sets the price of shares. The employee share purchases or sales are typically once a year or less, for administrative efficiency, though employers can set up payroll deduction programs to spread out the cost.

Read: Canadian employee ownership trust model missing incentives for companies: expert

“It wouldn’t be like employees have the opportunity to sell at any point,” says Phillips. “That is one of the factors that, through the education and the communication when you’re creating these programs, is really important for the employees to know — what are the benefits and the upsides, but also what are the risks? The liquidity is one [risk].”

When ESOP Builders educates an employer’s workforce, Phillips and her colleagues communicate the “whole picture” of employee ownership, including the company’s historical financial performance and future forecasts, the business’ strategy and the role employees play in making the business successful.

She estimates most of her employer clients have both an ESOP and another retirement savings vehicle, so they need to educate plan members on the intentions behind each. However, some employers don’t have many other benefits, so the framing around the ESOP is different. “They won’t have a retirement program so . . . the communication [around the ESOP] is, ‘We’re starting this for these reasons and the side benefit is you get a group savings plan.’”

Legislative moves

Last year, the federal government introduced legislation to support employee ownership trusts, a model that could make it easier for business owners to sell their companies to employees than through an ESOP.

It also introduced a tax incentive, in place until the end of 2026, which gives qualifying business owners who sell to employees through the trust structure a tax exemption on the first $10 million of capital gains on the company sale, as well as allowing them to spread the tax cost from the sale over a decade.

In the EOT model, the money to buy out the business owners generally comes from the company itself: the trust can take on debt to pay the owner part or all of the purchase price and the debt is repaid with the business’ profits. Business owners must sell at least 51 per cent of the business to a trust to qualify for the tax incentives.

Read: 2022 DC Plan Summit: How Scotiabank connects financial wellness to overall well-being

In contrast, business owners using an ESOP to sell part or all of their company to employees typically determine how much of the business they plan to sell and then sell chunks on a yearly basis over a defined period of time. One of the most common questions Phillips hears from employers is about whether employees will even be able to afford to participate.

While some organizations, including EllisDon, Centra Windows and Spartan Controls Ltd., have sold a majority of company ownership to employees through an ESOP, it typically takes “a long time and is pretty rare,” says Jon Shell, chair of Social Capital Partners and an advocate for EOTs.

Phillips, who also sits on the board of directors for Employee Ownership Canada, thinks the EOT has the potential to overtake the ESOP for business owners looking to sell to employees, but she adds there’s still more the federal government can do to incentivize business owners to go that route. This includes extending the current tax incentives or making them permanent, increasing the capital gains exemption beyond the first $10 million and allowing a smaller percentage of a company to be sold to the trust (or a larger amount over a longer period of time, rather than the current 51 or more per cent immediately).

“We’re still working on . . . trying to guide them to really make it as attractive as possible for business owners and also for employees,” she says.

Kelsey Rolfe is a freelance writer.