The past few years have seen the rise of India Inc and with it witnessed the flowering of a robust startup ecosystem. In April this year, we witnessed a week like none other when 6 startups entered the unicorn club in a week. Some of these unicorn startups such as Licious made news not only for grabbing the unicorn status but also because of how they chose to share their good fortune with their employees through ESOPs.
Not just unicorns, other startups such as PhonePe, Wakefit, etc. rewarded their employees across the board with ESOPs as a method to reward talent and prevent attrition. These strategies are becoming especially relevant as India Inc (and the startups) enter a battle for talent, the likes of which we haven’t seen for years. Cash-out opportunities and liquidity events have created a real appreciation for ESOPs in the Indian market making it a valuable tool to drive employee engagement and attract and retain top talent. Most startups are using ESOPs to build an incentive for the employees to help them remain invested in long-term organizational growth. By enabling ESOPs across levels and not keeping it limited to the top, organizations are creating opportunities for employees to participate in the wealth generation opportunity that they have helped create.
Licious, for example, in their maiden ESOP plan promised to benefit more than 800 employees across functions. This includes processing staff and delivery boys along with their corporate employees.
Wakefit.co’s ESOP plan rewards all their employees including the back-office staff as they believed that early employees played a significant role in their growth story. Later in the year, Sharechat announced plans to extend ESOPs to every employee on their payroll.
Established companies like Persistent Technologies too jumped on the ESOP bandwagon and came up with perhaps one of the most inclusive ESOP plans in the global IT industry extending to 80% of their global staff.
2021 was the year of ESOPs – The trend continues
To term 2021 as the year of ESOPs wouldn’t be an understatement. However, we believe that this trend is only going to increase at an accelerated pace in the coming year. This is primarily because ESOPs have now proven their worth as a powerful tool to attract and retain the right talent and provide the right incentive to become invested in an organization’s growth story.
The startup ecosystem in India is expected to forge ahead on this positive growth trajectory in the coming year. However, startup success is directly related to the kind of talent that they can attract. ESOPs have proved to be a vital part of compensation strategies and not just a tool to incentivize senior management. ESOPs have emerged as a retention-cum-cash conversion tool and are especially beneficial in the cash-strapped startup ecosystem since pay-outs under ESOPs only happen a few years from the date of grant.
2021 was a pioneering year in startup IPOs. It is anticipated that 2022 will see this phenomenon reaching new heights with many more unicorns and online businesses poised to go public. Venture capitalists also expect to invest in around 300 new startups in 2022.
Back in the 1990s during the IT boom, ESOPs had become the harbinger of good times. A large number of companies allotted them to employees and helped them generate wealth as the organization became successful. We have all heard stories of how office assistants, secretaries, and even drivers in Infosys, the first company to offer ESOPS, became millionaires owing to the ESOP options offered by the company.
The interest in ESOPs waned as the dot.com bubble triggered the dramatic fall in IT stocks. The market today, unlike back then, while volatile has matured tremendously. Today, ESOPs can work wonders since their value is often transformative when compared to an employee’s annual income. Employees are also not taking any undue risks since the cash outflow only happens when the option is exercised.
Enterprise recruiters and startups have also been vocal about the staffing challenges amid a growing skills gap. Most stated that there was no better time to be a techie than now especially amid record job openings and rising attrition. A specialized staffing firm reported that there were 2.7 lakh job openings in 2021 as opposed to 2 lakh in 2020. This trend is likely to increase as technology and its ancillary ecosystems mature. The IT sector alone is looking towards hiring 4.5 lakh gross employees by March 2022. Funded startups are expected to hire 30,000-50,000 people in FY22 with the existing headcount standing at 2.5 lakh employees.
The war for talent has become intense and is only going to move along the upward trajectory. That apart, talent is being lured by skyrocketing salaries and Rs. 1 crore packages that are now becoming achievable and not just aspirational for even newbies. With so many players in the market, startups and SMEs will need to employ attractive incentives to attract and retain talent. While ESOPs might be a trend that started in IT, today organizations in sectors such as banking, retail, manufacturing, capital goods, etc. are also identifying the power of ESOPs.
In a time when multiple job offers and sky-high salaries have become a norm, ESOPs will continue to be the tool that will help startups sweeten the deal in an intensely competitive market. It seems clear that 2022 will be the “Year of ESOPs – the Sequel!” And like all sequels, it will take the familiar storyline but drive it into new and unexplored territories. We expect to see many ESOP innovations and some new challenges emerging. It’s sure to be a year that keeps ESOPs in the headlines.