Every business worth its name today is trying its best to be employee-centric in its policies and in its work culture. There are many ways that companies can take care of their employees; Helping them generate wealth is one that is gaining increasing importance. The idea first took root around the dotcom era, when Internet and technology companies wanted to attract and retain the best talent, and it has gained wide acceptance over the years.
Today, many companies, across industry sectors, offer equity-based incentives and rewards to not only attract but also motivate high-performing employees. These incentives can take many forms: employee ownership through profit-sharing, profit-sharing, broad-based stock options, or ESOPS (short for employee stock option plans, or employee stock ownership plans). The trend is being led mainly by private companies and startups.
A win-win deal for companies and employees
The bouquet of options being offered by the employers is in recognition of the expectations of the employees and the evolving paradigm to suit their needs. Some candidates expect profit or profit sharing where they expect growth to accelerate and profits to boom, a scenario more likely to occur in founder-led early-stage companies. This is especially true in the case of high achievers who see themselves as a great asset to the company. Companies are also willing to extend such benefits to attract bright talent and extract the best 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. Such equity-based motivation is a good idea as it creates a sense of ownership among employees and fosters a collective sense of accomplishment and celebration among them and their organization. Furthermore, ESOPs give a lot to the sponsoring company as well as its employees. tax benefits, It’s a win-win situation: Employees enjoy financial benefits and ownership, while companies can channel their enthusiasm to drive better business results.
In fact, ESOPs have been seen to have a motivational effect on employees, who motivate themselves to give their best, as the success of the company has now translated into financial rewards for them. By giving them an extra 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 view ESOPs as a reward or a token of appreciation for their hard work and commitment. In this subtle yet effective way, ESOPs help improve business longevity and resilience even in a tough economic environment.
Momentum for ESOP buyback in India and abroad
Employees also benefit from ESOP when the company executes the following buy back or launches an initial public offering (IPO). If the company — and therefore the stock — does well, the employee can cash in on it at a higher valuation. ESOP buyback is a relatively new trend which was started by Flipkart in 2018. Since then, other startups have also begun announcing ESOP buybacks — sometimes in multiple rounds — to retain and hire top talent in a highly competitive market.
As per industry estimates, the employees of many organizations get a total of 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 in 2021 amount to $440 million startup Taking that route in order to reward employees and prevent equity dilution.
ESOP buyback is quite common in other countries as well. For example, many large companies and startups in Southeast Asia offer ESOPs to improve employee retention and attract talent when they are unable to offer high salaries. In Japan, 91% of all listed firms offer ESOPs, which collectively benefit more than half of their employees. ESOPs have also gained popularity in the Philippines, Indonesia and Singapore – particularly in the tech industry, where talent is in high demand but in short supply.
As more areas of growth emerge and talent demands the right price, companies’ reward policies will continue to evolve. Businesses that offer them will stay a step ahead of the competition, not only creating wealth for their employees but also creating great goodwill among them, an invaluable asset.
The author, Lloyd Mathias, is an Angel Investor and Business Strategist
Disclaimer: The views and recommendations given above are those of the individual expert and not of Mint.
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