Do your employees value their ESOPs

Written By:
Team Qapita
September 14, 2023

Companies grant ESOPs to employees with three major objectives: sharing wealth, rewarding performance and making them think like a shareholder (owner). Giving Equity as a part of compensation is a very costly proposition because the cost of equity is far higher than cash pay-out. More and more companies are granting ESOPs despite knowing this. While on one hand, Shareholders and the Board feel that they are giving significant value to employees, the latter do not necessarily share the same feeling. If this is true, we have a serious perception to address. This article helps understand and address this gap.      

The Perceived Value Gap in ESOPs

Employee Stock Ownership Plans (ESOPs) are a way for companies to share ownership with their employees. They can be a valuable tool for rewarding employees, motivating them to perform well, and aligning their interests with those of the company.

However, there is a perceived value gap between what companies believe ESOPs are worth to employees and what employees actually perceive them to be worth. This gap can lead to dissatisfaction and disengagement among employees.

Why is there a Value Gap?

There are a few reasons why there is a perceived value gap in ESOPs. First, companies often focus on the cost of equity when making ESOP decisions. They may believe that the high cost of equity means that the ESOP is a valuable benefit for employees. However, employees may not be willing to take on the same level of risk as the company. They may also not understand the long-term nature of ESOPs or the uncertainty of their value.

Second, employees may not feel like they are truly owners of the company. They may not have any voting rights or control over how the company is run. This can make it difficult for them to feel connected to the company and its success.

How to Bridge the Value Gap?

There are a few things that companies can do to bridge the value gap in ESOPs. First, they need to communicate the value of ESOPs to employees in a clear and understandable way. This includes explaining the long-term nature of ESOPs, the risks involved, and the potential rewards.

Demonstrate emotional value  

ESOP is not only a financial reward. It also has a strong emotional value. Companies need to treat ESOP holders as shareholders. This means sharing information with them about the company's performance and giving them a voice in decision-making. It also means making sure that ESOP holders have the same rights and benefits as other shareholders.

Have Transparency and Fairness in the terms of agreement

Companies need to make it easier for employees to exercise their ESOPs. Options are governed by the Grant agreement between the employer and employee. The terms of the Offer should be fair and reasonable for the employee. Clauses related to Tag along, impact of termination without cause are often worded one sided.

Different scenarios and clauses should be openly discussed before having a formal agreement. There have been cases when promoters and investors have encashed their options, but the employee options were not allowed to be encashed. Though it has been rare, there have been instances where CEOs have been terminated without cause just before the vesting date.  

By taking these steps, companies can bridge the value gap in ESOPs and make them a more valuable benefit for employees.

Here are some additional tips for making ESOPs more engaging for employees:

  • Hold regular meetings with ESOP holders to update them on the company's performance and answer their questions.
  • Create a culture of transparency and openness around ESOPs.
  • Offer educational opportunities for employees to learn more about ESOPs and how they work.
  • Recognize and celebrate employees who exercise their ESOPs.

By taking these steps, companies can make ESOPs a more valuable and rewarding benefit for employees.

Also Read: Structuring an Employee Friendly ESOP Program to Attract and Retain Talent

Team Qapita

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