Employee stock ownership plans (ESOPs) have emerged as the latest tool to attract and retain talent across all levels of employees with an increasing number of startups offering this option and announcing buybacks in the recent past.
Indian companies have spent close to Rs 2,500-3,000 crores a year to buyback ESOPs during the pandemic.
Industry experts say offering ESOPs to employees beyond leadership is primarily driven by the need to attract and retain top talent in relatively young businesses, especially in startups or tech companies.
“An ESOP buyback is also used to acknowledge and reward employees for their efforts, especially for companies that saw unprecedented growth during the Covid-19 pandemic. As most millennial and Gen Z employees are inclined towards faster growth and success in their careers, these companies become attractive employers when compared to their competitors,” says PS Viswanath, MD & CEO, Randstad India.
“Employee-ownership programmes have played a very critical role in young companies and stock options allow the employers to reward the employee for taking the risk of joining a budding company,” he adds.
As startups enjoy stimulus benefits from the government and funding from large companies, these employers can use stock options to make the job offers competitive and also to provide an opportunity to the employee to participate in the future success of the company.
Viswanath says this keeps employees invested in the growth of an organisation that they can also reap benefits from. “This practice is gaining extreme popularity in India with employees now preferring a compensation structure with a larger ESOP (around 30-50 per cent) shares instead of the cash component. As a result, the employee’s wealth creation opportunity increases manifold, thereby boosting his/her productivity. This is a win-win situation as employers can then make these employees key stakeholders of the organisation and also lock in a long-term retention plan of top talent,” he adds.
ESOPs helps drive ownership among employees
Vivek Gulati, Co-Founder & COO, Grip, a digital platform for new-age investments, finds ESOP one of the most effective strategies to reward and retain employees.
“It is the best way to tell employees that they have made valuable contributions to a company's growth. It also reflects the company’s intention to invest heavily in their employees and help them grow with the company. ESOP has 3 important roles: to create long-term wealth for employees, reward employees and make them part owners of the company, and lastly, helping a company retain employees in the long term,” he says.
Gulati says as part of the retention strategy itself, they think that creating liquidity events from time to time gives all employees a transparent knowledge of the wealth they are creating and appreciate the growth of the company in a smaller time frame.
Grip successfully facilitated its first ESOP buyback within just 18 months of inception and saw a fantastic response from employees, with most eligible employees opting to stay invested in the company.
“ESOPs helped us drive ownership among employees as the options make our employees part owners of the business and the growth is driven by them acting as our partners. There is a collective sense of achievement as we celebrate our wins together, which is what helps drive better productivity as well,” says Gulati.
ESOPs effective tool for employee wealth creation
ESOPs are an effective tool for wealth creation and enable employees to develop a greater sense of belonging to the company, says Akshay Munjal, founder and CEO, Hero Vired.
“It also helps in finding the best talent and retaining employees in a booming economy. ESOPs allow individual employees to benefit from a company’s growth over time and have a sense of ownership as it provides them with a stake in the company. Employee morale and trust in the organisation also improve when they have a stake in the company they work for,” he adds.
Hero Vired, which recently announced its ESOPs initiative for faculty, claims to be the first edtech company to roll out an ESOP program within the first year of the launch.
“We believe faculty are the backbone of a learning company like Hero Vired, especially where the focus is more on live instructor-led sessions. They are excited about the value and wealth creation opportunity that we are enabling for them. By focusing on results, we are bringing an entrepreneurial mindset to the roles besides inculcating curiosity and a spirit of winning together,” says Munjal.
Currently, Hero Vired’s top performers are also rewarded with ESOPs and the company plans to extend this benefit to the larger employee base by bringing them all under the programme in the near future.
Motivating factor for employee performance
Various studies indicate that capital-sharing arrangements, such as ESOPs, might make employees feel more encouraged and happy, leading them to be motivated to work and stay with the company long term than they would otherwise.
Mrinal Sinha, CHRO at online used car marketplace CARS24, says ESOPs build inclusivity with the employees along with the company's growth and further acts as a motivating factor for them to perform their best.
“In 2021, the ESOPs buyback by Indian startups was close to $450 million which is the highest to date for India. This shows that ESOPs are starting to become a popular choice for startups and are being welcomed by employees,” he says.
CARS24 has had an annual ESOPs buyback policy for the past four years which, says Sinha, “has enabled us to give back to our employees in every way possible.”
One significant caveat that many unlisted companies include in the ESOP contract is that employees cannot sell the stocks to an outsider unless the promoters agree.
“Hence it is advisable for companies issuing ESOPs to choose a vesting period that best suits the needs of the company while rewarding the employee for his/her contribution. Having said that, they must ensure that their shareholders are fairly compensated, especially if they are new in the business,” says Viswanath.
Mrin Agarwal, founder director at financial education firm Finsafe, says: “Often, I find employees tend to prefer short-term cash over long-term benefits and this may lead to attrition. In my sessions, I find participants not too aware of the way the ESOPs or taxation on them works and they want to cash out immediately. Employers need to focus on educating employees on all aspects of ESOPs so that employees can evaluate long term prospects better."