Since the evolution of Corporate Sector, businesses & employees have gone hand in hand. Employees are the building blocks of any business, so they need to be the part of growth & sharing. In today’s modern business world, human capital has become one of the most important resources. The enterprises are, therefore, more than ever interested not only in retaining their employees, but also for attracting the best talent from outside. Motivation is strongly connected with the employee’s association with the company and is one of the main causes of good or bad performance and thus affects overall operations of the company.
Enterprises adopt various means & measures to resolve the concern pertaining to employee engagement ranging from monetary incentives to appraisals in kind etc. It is important for companies to look for suitable strategy which result in creating win-win situations of employees & employer as well. In such a scenario, ESOPs / Employee Stock Option Plans, as a tool to reward & retain key human talent have gained enormous acceptance and adoptions worldwide.
MEANING OF ESOP
An ESOP is a right given to an Employee to get the Shares of the Company at a pre-determined price which is generally discounted. This serves as an alternative against cash-payouts in the name of salary and rather welcomes the Employees on the ownership podium of the Company. It is a kind of deferred compensation strategy on the part of the Company the benefit of which gets transferred to the Employees over a period of time and ultimately results in wealth creation for the Employee. Enterprises are progressively adopting non-traditional methods for making payments to their Employees. Hence ESOPs have become the most popular and accepted form of Employee Compensation. ESOPs are an incredibly effective tool that can simultaneously benefit an Organization, its Shareholders and its Employees.
RESTRUCTURING MODES UNDER ESOP
Over the years, various variants of Stock option Plans have evolved, ranging from Equity Linked Incentive Plans and even Non-Equity Linked Incentive Plans.
Equity linked plans entitle Employees to the Equity Shares of the Company & it includes:
- 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 take 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 Employee to purchase Company’s shares, often at a discount from 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: Under such incentive plans, the Employee is awarded with the shares subject to fulfillment of certain underlying conditions. If the said underlying conditions are not fulfilled, then the awarded shares stand withdrawn. Till about a decade back, these were offered majorly by companies overseas. But now RSUs have gained momentum in India.
Non-Equity Plans entitle Employee to get cash benefit which is linked with the value of the stock of the Company & it includes:
- Stock Appreciation Rights: SARs provide employees with cash payments equal to the appreciation of the company’s stock over a specified duration which is generally between the date of grant and final exercise of options. SARs can be settled either by allotting Equity Shares, equivalent to the amount of appreciation or by simply paying the value of appreciation in cash.
- Phantom Stocks: Phantom stock is a form of long-term deferred compensation using the Company shares as the measuring device for calculating the value of the deferred compensation. The Employee is rewarded in the form of cash corresponding to the value of the Company’s Share on the date of maturity / exercise.
The corporate culture has changed over the years, now the management not just want to payoff the employees, they also intend to engage, motivate & retain them. This results in more loyal, hard-working workforce. Equity-based incentive plans create a sense of belongingness among Employees as they get directly linked with the growth of the Organization. It makes the Employees think and work as an intra-preneur & 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 both for Companies as well as Employees:
Benefits for a Company
- Helps to attract & hire desired employees.
- Helps to address the question of Employee Engagement & reduce the attrition.
- Boosts immunity of a Business owner.
- Tax Benefits / Exemptions.
- ESOPs are a cashless compensation strategy.
- Catalyst for employee behavior.
- It’s a non-cash investment of an Employer to gain human assets.
- Create successful teams through shared goals.
- Alignment of individual & organizational objectives.
Benefits for an Employee
- Financial Rewards, linked with individual and organizational performance.
- Long term savings and wealth creation.
- Improve awareness about the corporate plans of the organisation.
- Enhances job satisfaction.
- ESOPs are often linked with employee engagement and involvement and this presents the opportunity to influence decisions about products and process.
- 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 in India in the early 90s and it was firstly adopted by the IT Companies as an incentive plans for their senior management. However the concept has now successfully floated in various industries such as Banks, Pharmaceuticals, and Finance etc. 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 is different for different type of Companies, however, no Company is prohibited from doing the same except Proprietorships, LLPs & Partnership firms.
For Listed entities, SEBI, the market regulator, has put in a place separate set of Regulations named as SEBI (Share Based Employee Benefit) Regulations, 2014. Any kind of Equity Incentive Plan chalked out by a Listed Entity has to be in alignment of the provisions of the said regulations. For Companies other than the Listed ones, lawmakers have chalked out governing provisions under the Companies Act, 2013 and Rules thereunder, thereby making it smooth for Corporates to think over and frame such incentive plans to reward their staff for their performance & loyalty.
Also, it’s quite interesting to see that the trend of ESOPs is constantly increasing in start-up companies. It is a strategy that young startups are adopting as they fight to attract & retain talent in a competitive market. Since a startup cannot afford an industry standard salary, the trend of offering equity stake to key people 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 long-term growth potential of a business is directly proportional as to how well it is able to maintain a balance between satisfaction of its employees 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 a carrot, which can be diligently used to reward employees without cash outflow, and make them a partner in your growth.