Would it surprise you to know that companies that offer ESOPs weather economic crises better than those that don’t? But it’s true.
Research from Rutgers University and the University of Massachusetts Amherst, for example, showed that publicly traded companies with ESOP plans are more likely to survive boom and bust cycles and maintain steady employment rates as well. They are also more likely to survive periods of recession.
This is not a new phenomenon. In fact, research from Georgetown University’s McDonough School of Business that studied ESOPs discovered that these “companies performed better in 2008 compared to non-S-ESOP firms along with a number of dimensions, including job creation, revenue growth, and providing for workers’ retirement security.” The recession in the U.S had begun in the winter of 2007.
The power of ESOPs lies in how they give employees ownership of the company. That’s why ESOPs are often pitched as an incentive plan to hire and retain top talent, especially in a startup environment. They are also used to reward high-performing employees or as incentives for senior management.
However, organizations stand to win a great deal more if they create an ESOP plan that has a wider footprint and can reach the far corners of the organization.
Persistent Systems, for example, recently announced the extension of their Employee Stock Option Plan (ESOP) plan to cover approximately 80% of their global workforce. Persistent’s logic behind this move was to reward employees for their continuous support and build a sense of broader participation and ownership.
Licious was another company that recently launched an employee stock ownership plan, amid aggressive expansion plans. Their ESOP plan is also very inclusive and covers an array of employees across categories including processing centre staff, delivery boys, and corporate employees. The objective of the initiative is to enable wealth creation for employees and recognize them for their hard work and commitment.
Having a wide-ranging and highly inclusive ESOP plan can help:
- Recognise ‘key’ employees across business functions and level the playing field for all employees. It allows organizations to compensate such employees not only through payroll but through competitive benefits.
- Drive a sense of ownership and instil higher degrees of accountability across the employee spectrum. When ESOP plans are not restricted to a select few ( think top management) and are more democratized then they can cover wider ground and can be used to successfully motivate employees across functions and levels
- It changes the employees’ perspective of the role they play in the company and its future and help them think and act like its owner. Increasing employee access to ESOPs by expanding the ESOP footprint plays a great role in driving the motivation levels of the workforce in numbers and can significantly boost productivity and consequently, the bottom line.
- Reiterate the organization’s commitment towards investment in their employees, their success, and aspirations by providing shared access to long-term financial benefits to a wider workforce. Better employee engagement levels and higher degrees of commitment become automatic consequences.
Such policies can become lightning rods to attract and retain top talent and become a boon for startups
The value is apparent but what stops all companies from opening up their ESOP narrative?
Well, developing and rolling out a highly-inclusive and widespread ESOP plan does not come without complexity. Here are a few things to navigate when implementing a wide-ranging ESOP strategy
Innovative and unique
Not all are created equal in the ESOP universe and one-size-fits-all doesn’t work here. Having a widespread ESOP strategy is not enough. It has to also be a good ESOP strategy that is aligned to the needs of the company and startup and is also widespread. The ESOP strategy should be well-designed, innovative, and unique and must provide great satisfaction to the management as well as the employees. It is crucial for the employees to have faith in the ESOP plan and believe that there’s a real reward waiting for them when the time arrives.
These plans, however, cannot be static and have to evolve and grow as the organization grows. The objective of the ESOP is to build equity pools that evolve as the company grows. Thus organizations need to understand and transparently calibrate the equity share as the organization grows.
Manage all ESOP aspects with dexterity
With more numbers coming under the ESOP umbrella, organizations need to evaluate their capability to handle several ESOP aspects such as plan management, cap table management, trust management, and liquidity event management. That apart, there is tax compliance, option valuation, and accounting, share valuation and plan design to manage. Ensuring clear and ongoing employee communication to explain the plan and answer questions are other areas to cover.
Ensure clear documentation, administration, and compliance
Manual records and practices have to evolve and get digitized to allow management of the ESOP plan with ease and comfort. Organizations have to look at optimizing their documentation, administration, and compliance focus to capably and clearly manage their ESOP programs.
Managing the tax and compliance regulations that keep changing needs expertise. In early-stage growth companies and startups, it can be hard to get this expertise and quantifying the tax obligations become complicated. Employing the right accepted models for option valuation and getting the right advice on accounting charges for the companies become critical consideration points when implementing widespread ESOP programs.
Corporate culture has undergone vast shifts over the past few years. The employees are now planted firmly in the driver’s seat and if organizations want to be successful and profitable then the focus has to move from simply paying the employees towards making them invested in the organization. That apart, organizations have to identify ways to keep employees motivated and engaged to avoid attrition and ensure retention.
ESOPs can be a significant tool to attract and retain employees when they are wide-ranging and inclusive. However, ESOPs can only function when the plans are designed, communicated, and managed well. What organizations need is to develop the capability to manage all aspects related to ESOP design, documentation, roll out, administration and compliance. They need to suitably plan liquidity events to keep their employees excited about ESOPs. They need to capably manage the critical regulations governing ESOPs and whom these can be offered to. Taxation and accounting regulations need navigation on the treatment of ESOPs with respect to grant, vesting, exercising, etc. Along with this, they need to evaluate which equity-based compensation plan and which instruments will make their ESOP strategy one that assists in employee engagement.
Connect with us to see how we can help your company leverage ESOPs to build greater ownership and accountability in your organization across all levels and play a pivotal role in driving organizational success. If you are a startup or an unlisted company our experts can help you leverage equity compensation as a major tool for talent management.