ESOPs make start-ups competitive as against bigger companies who are paying 20-30% higher salaries
It is not a new thing. It actually started back in the early 2000s when there was the dotcom boom. But it seems to have made a comeback. It’s the return of the employee stock option.
This is one more way to attract talent – firms have again resorted to offering ESOPs to woo the best talent. And this is especially true for start-ups.
According to the India Skills Report 2015, “There is an increase in the employability of the skill pool and parallely, the corporates are expecting a rise of about 23 per cent in number of jobs.” And as a consequence to this, companies today are struggling all the more to attract differentiated talent. To tackle this, companies have now resorted to innovative solutions to hire talented and young professionals.
Start-ups today have set this defining trend of offering stocks to students in IIMs or IITs. Offering 1-2 crore of annual packages, half of which consists of employee stock options, companies like Flipkart, Snapdeal, and Housing.com have been in this game for long now. ESOPs seem to be a safe option for start-ups when it comes to hiring talent. It acts as an appropriate tool to hire talent as paying high salaries is often a challenge with start-ups; and for the listed companies, it acts as a retention tool for high performers.
According to Sudip Mukhopadhyay, Managing Partner, Vantage Health and Benefits Consulting, "When start-ups offer ESOPs, it is not based on any concrete financial equation. It means the company is offering a vision and the candidate is willing to be part of that vision.” But there is another side to it. “ESOPs make start-ups competitive as against bigger companies who are paying 20-30 per cent higher salaries," says Satish Madhira, founder of Yasu Technologies. Anshuman Das, Managing Partner at Longhouse Consulting, a recruitment firm that works with startups states that “After the IT services industry, ecommerce is now the next big opportunity for employees to create wealth. The message going out to entrepreneurs is that wealth creation cannot be restricted to just the founders."
InMobi, a mobile advertising company, known for having best people practices also offers RSUs (Restricted Stock Units) as a method to attract and recruit employees. Famous for recruiting from leading institutions like IITs, BITS Pilani, VIT, PESIT, XLRI, InMobi’s Director-HR Kevin Freitas says that "Our business is scaling so rapidly that people who join us are sure to benefit from these RSUs. We also provide RSUs as an incentive to employees who meet certain performance parameters. They can exercise these options at the time of listing of the company or in the event of a buyout.”
Hiring talent has been a major challenge for all organizations. And certainly components such as ESOPs and RSUs added to the annual compensation have inadvertently elevated the competition between the listed companies and the start-ups. Substantiating this, it can be stated that now MNCs and start-ups are in competition to hire the best of the talent from institutions like IIMs and IITs.
A report on campus compensation by Zinnov, a management consulting firm suggests that the MNCs are now competing with the packages offered by start-ups to recruits from Tier 1 engineering colleges – where the average CTC offered by MNCs in Tier 1 colleges was around Rs 14.3 lakh, while startups offered Rs 16.5 lakh. It is also stipulated that the funding received by start-ups are enabling them to offer high salary packages.
Apart from this, ESOPs are used more for employee retention as well. Not just a luring tool for the start-ups, many organizations are now known to offer such options to retain their existing talent pipeline, motivate them and also give them a sense of ownership and wealth creation.
Today, organizations are providing stock options as a part of the annual package to hire because this allows them to compensate without a charge to their bottom line which has been seen to improve employee retention and reduce churn by incentivizing employees for the long-term.