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Changes in laws needed to introduce ESOPs.

Byline: Study shows stock ownership for staff raises loyalty and productivity.

Dubai: The number of Employee Stock Ownership Plans (ESOPs) companies has grown substantially during the past 10 years, and they are currently estimated to hold more than $500 billion in assets and cover over 10 million workers in the US alone.

Around 70 per cent of the private companies in the GCC are family-owned and run largely by an expatriate management. ESOPs increase profitability by about 2.3 per cent to 2.4 percent over non-ESOP companies, according to a recent study.

"The main reason for this growth is that ESOPs succeeded in increasing employee loyalty and commitment to an organisation, which resulted in improving corporate financial transactions significantly," the report stated.

According to the study - which paired 1,100 ESOP companies with 1,100 comparable non-ESOP companies - ESOPs appear to increase sales, employment, and profitability by about 2.3 per cent to 2.4 per cent over non-ESOP companies.

The study also examined whether ESOP companies stayed in business longer than non-ESOP companies and found that 77.9 per cent of the ESOP companies followed as part of the survey survived as compared to 62.3 per cent of the comparable non-ESOP companies.

Revenue

Moreover, 82 per cent of companies involved in the study indicated that their revenue increased after applying ESOPs while 72 per cent indicated that they saw an increase in their profitability.

In contrast to this trend across the developed markets around the world, stock ownership by employees in the Gulf region - where the majority of privately-held companies (around 70 per cent) are family owned and run largely by expatriate management - is still extremely rare.

Richard Lamptey, a principal with Mercer, Marcus Wallman, said, "In the UAE, there are some legal restrictions that should be addressed in regard to getting an ESOP approval and the fact that expatriate employees in the Gulf are not allowed to own stock in UAE national-owned companies.

"I think there is an urgent need to increase the degree of legal flexibility available in the creation of an ESOP, which will allow employers to establish plans to best achieve the defined objectives for which they are established," Lamptey added.

But as the prevalent economic boom in the region has meant that more and more companies are looking for talented employees - particularly at the senior management level - experts expect that many businesses will shift towards greater equity participation by employees. Currently, Standard Bank is among the first financial institutions to administer ESOPs in the region.

Demand

"As demand in the Gulf region for talented and experienced employees increases and retention strategies become ever more critical, the benefits to companies of ESOPs and other long-term incentives, is more evident," said Lynda O'Mahoney, senior manager, Corporate Fiduciary Services at Standard Bank.

"We are seeing unprecedented demand for these types of products, and their adoption in this marketplace will surely contribute to the success of those companies offering such schemes," O'Mahoney added.

With lack of regulatory framework and lack of clarity on ESOPs rules currently cited as the main obstacle for many companies planning to offer an allocation to employees, a change on this front is likely to pave the way for a significant wave of employee allocations in the future.

Definition: Retirement plan

An employee stock ownership plan (ESOP) is a retirement plan in which the company contributes its stock to the plan for the benefit of the company's employees. With an ESOP, you never buy or hold the stock directly. This type of plan should not be confused with employee stock options plans, which are not retirement plans. Instead, employee stock options plans give the employee the right to buy their company's stock at a set price within a certain period of time.

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Publication:Gulf News (United Arab Emirates)
Date:Mar 25, 2008
Words:647
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