Every business worth its name today is trying its best to be employee-centric in its policies and its work culture. There are many ways in which companies can care for their employees; helping them create wealth is one that’s gaining increasing importance. The idea first took roots around the dotcom era, when internet and technology companies wanted to attract and retain the best talent, and it has gained widespread acceptance over the years.
Today, many companies, across industry sectors, offer equity-based incentives and rewards not only to attract but also motivate high-performing employees. These incentives can take many forms: profit-sharing, gain-sharing, broad-based stock options, or employee ownership through ESOPS (short for Employee Stock Option Plans, or Employee Stock Ownership Plans). The trend is mainly being led by private companies and startups.
A win-win for companies and employees
The bouquet of options being offered by employers is in recognition of evolving paradigms, suited to employee’s expectations and their needs. Some candidates expect profit or gain sharing to benefit where they expect growth to be fast and profits to boom, a scenario more likely to happen in founder-led early stage companies. This is particularly true in case of high achievers who see themselves as a big asset to the company. Companies, too, are willing to extend such benefits to attract bright talent and the best effort from them.
ESOPs are offered by companies of all sizes, usually as a reward for good performance or long tenure with the organization, or as a corporate finance strategy to align the interests of employees with those of shareholders. Equity-based motivation of this kind is a good idea because it instills a sense of ownership among employees and fosters a collective sense of achievement and celebration between them and their organization. Moreover, ESOPs give the sponsoring company as well as its employees several tax benefits. It is a win-win situation: employees enjoy financial benefits and ownership, while companies can channelize their zeal to achieve better business outcomes.
Indeed, ESOPs have been seen to have a motivating effect on employees, who drive themselves to perform at their best, as the company’s success now translates into financial rewards for them. By giving them an additional reason to see the company’s stock perform well, ESOPs automatically encourage employees to do what’s best for all shareholders, including themselves. Employees also see ESOPs as a reward or a token of appreciation for their hard work and commitment. In this subtle yet effective manner, ESOPs help in improving business longevity and resilience, even in a difficult economic environment.
Momentum for ESOP buybacks in India and abroad
ESOPs also benefit employees when the company executes a buyback or launches an Initial Public Offering IPO. If the company – and therefore the stock – does well, the employee can encash it at higher valuations. ESOP buyback is a relatively newer trend that was kicked off in 2018 by Flipkart. Since then, other startups too have started announcing ESOP buybacks – sometimes in multiple rounds – to retain and hire top talent in a highly competitive market.
According to industry estimates, employees across multiple organizations received a combined total of over Rs. 500 crore through ESOP buyback in the year 2020 – a year that was marked by a pandemic-induced economic slowdown. ESOP buybacks in India amounted to $440 million in 2021, with startups taking that route for rewarding employees and preventing equity dilution.
ESOP buybacks are fairly common in other countries too. Many large companies and startups in Southeast Asia, for instance, offer ESOPs to improve employee retention and attract talent if they are unable to give out high salaries. In Japan, 91% of all listed firms offer ESOPs, which collectively benefit more than half their employees. ESOPs have also gained popularity in the Philippines, Indonesia, and Singapore – especially in the tech industry, where talent is in high demand but short supply.
Reward policies at companies will continue to evolve as more growth areas emerge and talent asks for the right price. Businesses that offer them will stay a step ahead of the competition, creating not just wealth for their employees, but also huge goodwill among them, a priceless asset.
The author, Lloyd Mathias is an Angel Investor and a Business Strategist
Disclaimer: The views and recommendations made above are those of individual expert, and not of Mint.
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