ESOPs - An Engagement Initiative - Let Your Employees Grow With You
Corporate culture has witnessed tremendous change over the years, and the management do not merely want to pay off the employees, they also intend to engage, motivate and retain them.
Ever since the evolution of Corporate Sector, businesses and employees have gone hand in hand. Employees, the building blocks of any business are required to be a part of growth and sharing, and in the business world of today, human capital has evolved as one among the perennial resources. The enterprises are driven towards employee retention and attracting the very best of external talent. Motivation, a strong connect for an employee's association with the organization, and, is one of the main causes of good or bad performance that affects the overall operations of the company.
Enterprises, therefore, adopt various means and measures to resolve the employee concern linked to engagement, which may range from monetary incentives to appraisals in kind and many more. It is also important for companies to look into suitable strategies, which result in creating win-win situations for both the employees and the employer. In such a scenario, Employee Stock Option Plans (ESOPs), as a tool to reward and retain pivotal human talent have gained enormous acceptance and adoption worldwide.
Stucturing Models Under ESOP
Over the years, various variants of stock option plans have evolved, ranging from Equity Linked Incentive Plans to Non-Equity Linked Incentive Plans.
Equity linked plans
Equity linked plans entitle Employees to the Equity Shares of the Company and they include-Employee Stock Option Schemes- Employee Stock Option Schemes are the most commonly used forms of Stock Option Plans. The option granted under the plan confers a right, but not an obligation, on the employee to acquire shares of the company at a predetermined price over a fixed period
Employee Stock Purchase Plans- This is another prevalent variant of Stock Option Plans. These allow the employee to purchase shares from the company, often at a discount, from the Fair Market Value. The terms of the Plan determine the tenure and price for the possession of the company's shares by the Employees.
Restricted Stock Units (RSUs) - Under such an incentive plan, the employee is awarded with the shares subject to fulfilment of certain underlying conditions. If the said underlying conditions are not fulfilled, then the awarded shares stand withdrawn. Even until a decade ago, these were majorly offered by overseas companies. Now, however, RSUs have gained momentum in India.
Non-Equity linked plans Non-Equity linked plans entitle the employee to get cash benefit, which is linked, with the value of the stock of the company and they include.
Stock Appreciation Rights (SARs) - SARs provide the employees with cash payments that equal the appreciation of the company's stock over a specific time period, which generally falls between the date of grant and the final exercise of options. SARs can be settled either by way of allotting equity shares, equivalent to the amount of appreciation, or by simply paying the value of the appreciation in cash.
Phantom Stocks- Phantom stocks represent a form of long-term deferred compensation that utilize company shares as the measuring instruments for calculating the compensation value. The employee is rewarded in the form of cash corresponding to the value of the company's share on the date of maturity or exercise.
Why ESOP? Corporate culture has witnessed tremendous change over the years, and the management do not merely want to pay off the employees, they also intend to engage, motivate and retain them. This results in a more loyal and a hardworking workforce. Equity-based incentive plans create a sense of belongingness among the employees as they are directly linked with the growth of the organization. It makes the employees think and work as an intra-preneur and motivate them to work effectively and efficiently in order to enhance the profitability of the business.
Benefits of ESOP
ESOPs come with multi-pronged benefits for the employees and the companies.
Benefits for a Company
● Helps to attract and hire desired employees.
● Helps to address the question of Employee Engagement and reduce attrition.
● Boosts the immunity of a business owner.
● Tax Benefits / Exemptions.
● ESOPs are a cashless compensation strategy.
● Catalyst for employee behaviour.
● It is a non-cash investment of an employer to gain human assets.
● Create successful teams through shared goals.
● Alignment of individual and organizational objectives.
Benefits for an Employee
● Financial Rewards, linked with individual and organizational performance.
● Long term savings and wealth creation.
● Improved awareness about the corporate plans of the organization.
● Enhanced job satisfaction.
● ESOPs are often linked with employee engagement and involvement and this presents the opportunity to influence decisions about products and processes.
- An increased sense of 'ownership' and association with the enterprise.
- Return on ESOPs can even be higher than a person's annual salary
Applicability of ESOPs on Various Types of Companies
ESOPs were introduced and adopted by the Indian IT companies in the early 90s as an incentive plan for the senior management.
However, the concept has now been successfully floated in various industries such as banks, pharmaceuticals, finance and many others. Considering the increased recognition and upward trend, lawmakers also acknowledged the concept and accordingly chalked out specific governing provisions under various laws.
The regulatory framework in India does not restrict any type of company to roll out Equity Incentive Plans / ESOPs for the benefit of its Employees. Though the legal coverage varies from one company to the other, apart from proprietorships, LLPs and partnership firms, no other entity is prohibited from facilitating the same barring those that are listed.
The Securities and Exchange Board of India (SEBI), has put in a place a separate set of regulations named as Share Based Employee Benefit Regulations, 2014. Any kind of Equity Incentive Plan chalked out by a listed entity must be aligned to the provisions of the said regulations. For non-listed companies, lawmakers have chalked out governing provisions under the Companies Act, 2013 and Rules thereunder, thereby smoothening the path for the corporates to rethink and frame such incentive plans to reward their staff for their performance and loyalty.
Further, it is quite interesting to see that the ESOPs trend is on a constant increase in startup ventures. It is a strategy being adapted to attract and retain talent in a competitive market. A startup cannot afford to pay an industry standard salary, and therefore the trend of offering equity stake to people pivotal positions in the company is increasing.
Growth, development, and broadening horizons of business in India as well as overseas have awakened the entrepreneurs towards employee recognition and retention. The longterm growth potential of a business is directly proportional to the ability to maintain a balance between employee satisfaction and preservation of its assets and financial resources. Companies are extensively focusing on providing various kinds of benefits to their employees over and above the fixed salary. In such a scenario, ESOPs proves to be the metaphorical carrot, as a diligent employee reward tool, not involving cash outflow, and make them a partner in your growth.
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