Article: It is time to innovate ESOPs

#ExpertViews

It is time to innovate ESOPs

As the internal champion of the compensation process, HR must drive innovations in equity-based compensation plans
It is time to innovate ESOPs
 

One of the most common reasons for failure of such plans is lack of employee awareness about these instruments. Companies should innovate here by designing creative employee communication programs, which will create awareness

 

Equity-based compensation plans, popularly known as ESOPs, have been in vogue for two decades. Over this period, all the stakeholders namely issuer companies, beneficiary employees, regulators and shareholders have had a reasonable experience of what this tool can deliver and how relevant it is in India Inc.’s scheme of things. To the regulators’ credit, they have been open to suggestions from the corporate sector and have responded favorably to their demands.

Two decades is a fairly long period for evaluating a compensation tool. During this time, it has withstood stock market turbulence and regulator’s scrutiny (mainly on the taxation front). The fact that companies in almost all the sectors have used them and continue to use them is a testimony of their acceptability. However, it is time companies explored more creative and customized variants of ESOPs to suit their respective objectives. Proposed modifications to SEBI guidelines are expected to allow use of secondary shares as well as design any equity-based instrument, which the shareholders would approve.

Areas of innovation

What are the opportunities for innovation in ESOPs? Broadly speaking, if the goal is to implement a plan, which is a win-win for all the stakeholders, one needs to innovate in the nature of the instrument used, plan administration processes around it and enhance the overall employee experience. Choice of an appropriate instrument is the most critical element in making the plan successful. Very few companies have used instruments other than ESOPs. A few variants of what companies can try are Stock Appreciation Rights (SARs), Employee Share Purchase Plans (ESPP), Performance shares, Matching shares or Phantom stock.

In order to be a win-win for all stakeholders, the instrument should be fair to all shareholders, employee-friendly in terms of its attractiveness and simple to understand. From the management’s perspective, the instrument should drive motivation and link reward to sustainable long-term performance. It is possible to design a customized solution that will satisfy all these expectations.

For the administrators, these plans pose unique challenges as they involve participation of multi-functional teams on a day-to-day basis. HR, finance and secretarial teams get involved at various stages leading to multiple hand-offs, overlap of roles and duplicity of data. This leads to confusion about who owns what task. Innovation in automating the process, use of web-based platforms, employee self-service would help in streamlining the administration tasks and make them hassle-free. Use of platform would enable use of single source of data, accessing information from multiple locations. More importantly, it would make the process less person-dependent.

One of the most common reasons for failure of such plans is lack of employee awareness about these instruments. The challenge is bigger if the employees are not exposed to equity shares and stock markets. This makes it difficult for them to appreciate the procedures and regulatory requirements involved. Companies should innovate here by designing creative employee communication programs, which will create awareness not only about the instrument but also about its limitations. Implementing cashless exercise can significantly reduce the paperwork and turnaround time for realization of cash. Use of trust route can eliminate direct exposure of the employees to the stock markets and hassles such as demat and broker account operations. Such innovations will help in making the overall experience a delightful one for the employee.

As the internal champion of the compensation process, it is for the HR team to drive these innovations and make the most out of equity based compensation plans.

Topics: #ExpertViews, #TotalRewards, Compensation & Benefits

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