ESOPs, which were once adopted as a tool to tie C-suite responsibilities to business objectives to make their pay competitive, have now found fame across the gamut of startups looking to hire great talent, engage them at work, and retain them for the long term. The size of the ESOP programs is reaching dizzying proportions. For instance, in an era where digital payments are growing exponentially, payment company PhonePe recently launched a Rs 1,460 crore ESOP program to allot stock options to all its 2,200 employees, enabling everyone to profit from its potential success.
However, if you do not take the right approach to building and executing your ESOP program, it can end up becoming a 4-letter word for an amorphous, illusory, and never-achievable prize among your top talent.
Read on to avoid landing in such a situation!
Issues with ESOP programs
Despite the several benefits that ESOPs offer, they also pose several challenges that cause employees to lose faith in them or not take them seriously. These include:
- Limited transparency: There is a general lack of awareness among employees of how ESOPs work when stocks are available or options can be exercised, and what happens to their “holding” as normal business events like fundraises etc. happen. Without that information, employees are unsure what’s due to them and when. They may tend to believe that these are just paper options and that the founders would never agree to substantially dilute their holdings. The prize appears hazy and uncertain and expectations drop dramatically. Employees tend to factor those out of their calculations when considering their employment circumstances.
- Lack of understanding of the value of options: Although ESOPs are a great way to retain your top talent, the big question is always how much they will be worth when it’s time to “cash in”. The company’s financial status and changing market conditions have a bearing on ESOPs, which can lower their value and threaten employee’s ESOP holdings. Employees with poor understanding, inadequate organizational support or insufficient ongoing handholding may set unrealistically high expectations of the benefit that will accrue from the ESOP. Such employees risk disappointment and could spread ill-feeling or raise unjustified questions about the value of the program among other potential employees.
- Perception of high risk: Employees understand that companies who roll out ESOPs directly link employee benefits with company performance. The upside is obvious but when these companies struggle financially, employees fear that they will end up losing out if liquidity events get delayed or never arrive. While the founders of startups enter this arena with a reasonably clear understanding of the risks involved, employees may not be quite so fatalistic. Uniquely perhaps, in India, this problem is exacerbated because of the limited understanding and participation in the stock market by the vast community of “professionals.”
Tips to improve employee confidence in your ESOP program
Here are some tips that can help improve employee confidence in your ESOP program:
- Enable transparent access to the ESOP program: One of the first tasks to take up for the success of your ESOP efforts is to enable transparent access to the ESOP program at all times. Since employees often have many unanswered questions when it comes to ESOP, offering visibility through a modern mobile app is a great way to overcome all their concerns and apprehensions. A mobile app can not only offer a real-time view of valuation along with information about factors that influence it; it can also provide employees with an easy to exercise option for a seamless and enhanced experience.
- Ensure effective plan management: Offering employees a single-window service to handle all aspects related to ESOP is also extremely crucial. Investing in a modern platform + managed service may be the answer to the problems of managing the program as well the employee support. You could help roll online grants and their acceptance, you can provide each employee with an individual login to view his/her grant documents along with necessary data and reports. Employees can use this login to exercise their ESOP, pay online to get shares from the company, as well as receive support for their queries via continuous reporting and analysis.
- Always strive for seamless employee communication: If you want to address all expectations with respect to ESOPs, you also need to constantly strive for seamless employee communication. This means educating employees about the benefits of the program, information on the various exercise options, as well as the conditions under which they can exercise it. Also, make sure you have a team or system in place that they can reach out to, to answer their queries.
- Prioritize (and plan) for continuous compliance: As an organization’s responsibilities keep changing, and as tax regulations evolve, companies need to have the right compliance practices in place. This is essential to adapt to applicable accounting standards as well as in effectively quantifying tax obligations. Update yourself with globally accepted models, understand what regulations apply to your organization, and implement appropriate procedures to ensure accurate and timely tax compliance.
- Finalize an ESOP structure based on the interests of your stakeholders: When you sit to finalize your ESOP structure, it is essential you weigh the interests of all your stakeholders concerned against each type of ESOP structure before you finalize on one that is best suited to the needs of your business and your employees. Irrespective of what kind of ESOP structure you eventually choose, make sure it creates substantial value for your employees, improves tax efficiency, and complies with the required laws.
- Consider giving them the choice to opt-out: In case possibility of a liquidity event seems very contingent, it may be worth thinking of giving your employees the choice to opt-out of the ESOP program, if they ever feel the need at a discounted reward. Make payouts quick and seamless and advise them to convert options into shares only at the time of a liquidity event that meets their expectations.
Given the role ESOPs play in attracting, incentivizing, and retaining top talent, several positive arguments can be made in their favour. But despite ESOP participation likely to continue to grow in the Indian business landscape, it is also important to pay attention to the risks they assume.
If you want to use ESOPs as a means to enhance employee productivity and retain your top talent, you need to drive efforts in increasing their trust and confidence in your ESOP program. By making them aware of the benefits (and risks), and advising them on investment best practices, you can more easily link their efforts and commitment to ownership and have them contribute to the betterment of the company.
