Article: How ESOPs can help you retain your top talent

Compensation & Benefits

How ESOPs can help you retain your top talent

ESOP is a kind of deferred compensation strategy on the part of the Company the benefit of which gets transferred to the Employees over a period of time and ultimately results in wealth creation for the Employee.
How ESOPs can help you retain your top talent

Finding good players is easy. Getting them to play is another story! ~ Casey Stengel

Employee Retention

Employees are the core strength of a business, without whom an Entrepreneur can’t even think of to start a business, making it a success is a different story. Hiring talented employees is just a start to creating a strong workforce. Retaining them with you comes as a next equally important step. High employee turnover costs business owners in time and productivity. With the emergence of the concept of a borderless world, enhanced financial integration, global business presence and easy mobility of the workforce, balancing sustainable growth and a pool of talent thereby ensuring same or better footing to its Employees what its counterparts are offering, has become critical. Therefore, to address the concerns of Brain drain and Employee Poaching, there is a need to contemplate new incentive plans that align the need of both Employees and the Employerfor their mutual growth and advancement.One of the most comprehensive strategy that has evolved with time and which is presently being actively used as an employee retention tool is ESOPs.

Retain through ESOP

ESOP is an acronym of Employee Stock Option Plans which makes the employee a part of equity ownership of the company by paying a very minimal amount of consideration. Over the years, ESOP has gained worldwide recognition and is now a most attractive tool for employee reward and retention. Even the lawmakers have given this subject due attention and madepart of Statutes. ESOP is a kind of deferred compensation strategy on the part of the Company the benefit of which gets transferred to the Employees over a period of time and ultimately results in wealth creation for the Employee. If the employees feel that they own a share in the company they try to make every bit count towards it. This aligns his individual objectives with that of the organization and makes him stay and work for the growthof the company. ESOPs acts as a great retention tool as it attaches the employees directly to the organization’s growth or fall, by making them intrapreneurand generating a feeling to work for own-self. Stock Option Plans are a cashless compensation strategies which act as a catalyst for employee behavior, thereby creating successful teams through shared goals.

Choices Available

Over the years, various variants of Stock option Plans have evolved, ranging from Equity Linked Incentive Plans to Non-Equity Linked Incentive Plans.

Equity linked plans entitle Employees to the Equity Shares of the Company and  it includes:

  • Employee Stock Option Schemes:Employee Stock Option Schemes are the most commonly used forms of Stock Option Plans. The option granted under the plan confers a right, but not an obligation on the employee to take shares of the Company at a predetermined price over a fixed period.

  • Employee Stock Purchase Plans: This is another prevalent variant of Stock Option Plans. These allow Employee to purchase Company’s shares, often at a discount from Fair Market Value. The terms of the Plan determine the tenure and price for the possession of the Company’s shares by the Employees. 

  • Restricted Stock Units:  Under such incentive plans, the Employee is awarded with the shares subject to fulfillment of certain underlying conditions. If the said underlying conditions are not fulfilled, then the awarded shares stand withdrawn. Till about a decade back, these were offered majorly by companies overseas. But now RSUs have gained momentum in India.  

Non-Equity Plans entitle Employee to get cash benefit which is linked with the value of the stock of the Company & it includes:

  • Stock Appreciation Rights: SARs provide employees with cash payments equal to the appreciation of the company’s stock over a specified duration which is generally between the date of grant and final exercise of options. SARs can be settled either by allotting Equity Shares, equivalent to the amount of appreciation or by simply paying the value of appreciation in cash.

  • Phantom Stocks: Phantom stock is a form of long-term deferred compensation using the Company shares as the measuring device for calculating the value of the deferred compensation. The Employee is rewarded in the form of cash corresponding to the value of the Company’s Share on the date of maturity / exercise.

Evolution of ESOPs in India & its worldwide recognition

The idea and concept of ESOP is as old as share. Mr. Louis Orth Kelso from U.S.A is recognized as inventor and pioneer of the Employee Stock Ownership Plan. He created the first ESOP Plan in 1956 for a closely-held newspaper chain where the retiring owners sold their shares to the employee. This was the first step taken by the pioneer and from that time till now the 50-plus years since then, ESOPs have become a popular alternative to empower employees, a sale or merger as a tool of business succession, and there are now more employee owners. The National Center for Employee Ownership reports (U.S.A) that the mid-1970s saw an increase in formerly nearly unknown ESOPs. By 2010, 13 million employees in U.S.A participated in ESOPs through 11,000companies. 

Indian Companies have  accepted and adopted ESOPs in the early 90's where the IT Companies, Manufacturing Companies and the Companies engaged in the business of providing services has started coming with various ESOP Plans. Although in India ESOP is used not as a Buyout plan but it's an incentive plan for the employees, helps to retain the employees and to reduce the attrition rate.

Be it a big organization, a medium one or a startup, the human asset is the most important resource responsible for its well-being and growth. Therefore it’s not only important to hire good personnel but at the same time making them stay with you is equally important. Awarding them with cash incentives will motivate them for short period but would not serve the organizational purpose of employee retention. Hence there is a need to chalk out strategies which serve the retention purpose along with employee motivation and incentives. In such a scenario, ESOP has come out as a beneficial tool that results in creating a win-win for both Employers and the Employees.


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Topics: Compensation & Benefits, Employee Engagement, #Retention

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