During a recent conversation with Rahul Somani, Head of operations - Consulting and Managed services at ESOP Direct-A Qapita Company., he provided insights into the current trends of Employee Stock Ownership Plans (ESOPs) in both listed and unlisted companies.
In discussion, Rahul emphasized that Employee Stock Ownership Plans (ESOPs) are widely recognized and utilized in both listed and unlisted companies. He highlighted the comprehensive nature of ESOPs, encompassing various aspects. ESOP Direct, in collaboration with Qapita, conducted their 10th ESOP survey, which occurs annually. This survey included approximately 300 companies, incorporating trends in India and Southeast Asia. Notably, it marked the first time that the survey received responses from around 86 companies in Southeast Asia, with the remaining respondents coming from the Indian region. The companies surveyed encompassed both listed and unlisted entities, with around 90 of them being listed companies. The survey spanned over a period of three months and targeted CEOs, CHOs, and heads of the companies as respondents.
Rahul said that the implementation of ESOPs serves multiple objectives for companies. Firstly, it aims to retain key talents crucial for the company's growth. By providing employees with ownership stakes, companies can reward and incentivize them simultaneously. This approach ensures that employee interests are aligned with the overall success of the organization. Moreover, ESOPs also play a role in attracting talented individuals from outside the company, including international candidates.
Determining the scope of ESOP coverage is a crucial consideration for companies as it helps them identify the employees they need to retain and reward. Various industries are implementing ESOPs and opting for a broad-based plan, aiming to align employee interests with the company's shareholders. There is also a growing trend among promoters to extend ESOP coverage to a larger number of employees. Interestingly, the implementation of ESOPs appears to be advancing at a faster pace in unlisted companies compared to that of listed companies.
ESOPs, RSUs, and SARs are equity-based instruments commonly used in Employee Stock Ownership Plans. Additionally, there are contribution plans like ESPPs (Employee Stock Purchase Plans) and quantum plans. Rahul highlighted the effectiveness of combining different instruments to achieve objectives and enhance performance. By utilizing a combination of instruments, companies can optimize their ESOP strategies. One instrument may be geared towards achieving specific objectives, while another can incentivize and improve overall performance. This approach allows companies to leverage the strengths of each instrument and create a more robust and impactful ESOP program.
During the discussion, Rahul shed light on the exercise price component in ESOPs, particularly in unlisted companies. He mentioned that in unlisted companies, the exercise price for employees is typically set at nil or zero. There is a transition taking place from using Fair Market Value (FMV) to Restricted Stock Units (RSUs) as the preferred method. When considering market price, the focus shifts towards time-based and retention-based factors, taking into account the duration of holding the options and the goal of retaining employees within the organization.
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In the realm of ESOPs, there is a noticeable shift from solely relying on ESOPs to a combination of ESOPs and RSUs, as revealed by Rahul. He also provided insights into the source of equity in the market. Listed companies are increasingly engaging in buying or selling shares through the secondary market, commonly referred to as secondary shares or the marketplace. This trend showcases a growing inclination towards secondary acquisitions. Moreover, there is a correlation between utilizing the trust route and issuing fresh options, which emerged as a significant trend in this year's survey.
Furthermore, many unlisted companies are opting for a direct approach and considering an initial public offering (IPO). When companies are closer to an IPO, they evaluate the trust component as well. Interestingly, the survey indicates that around 90% of unlisted companies prefer the direct route, and this trend has remained unchanged. The direct approach is favored during the early years of Series A, B, or C funding rounds to minimize compliance requirements.
When examining ESOP pool sizes, listed companies have shown minimal change, typically ranging from 0-5%. In contrast, unlisted companies have witnessed variations with pool sizes typically ranging from 5-10%. Notably, there has been an increase in the promoters' contribution to the ESOP pool, indicating their growing involvement in fostering employee ownership within the organization.
Frequency of Grants: Annual and Joining Grants to Attract Talent. Companies commonly adopt an annual grant approach for ESOPs, offering grants to employees on a yearly basis. Additionally, an emerging trend is the inclusion of joining grants, which serve as an enticing incentive for attracting new talent to the organization.
Quantum Grants: Significant ESOP Allocation in Unlisted Companies. In the case of unlisted companies, quantum grants have gained prominence. These grants involve allocating a substantial portion, often nearly or exceeding 100% of an employee's Cost to Company (CTC) per annum. The estimated benefit varies depending on the lifecycle of the ESOP program. It is worth noting that some unlisted companies extend ESOP coverage to junior levels as well.
Practices for Refresher or Top-Up Grants: Issuing refresher or top-up grants is typically contingent upon employee performance rather than being solely time-based. Many companies link the allocation of these grants to the individual's performance, ensuring that they serve as a reward for exemplary achievements within the organization.
Vesting and exercise periods play a crucial role in ESOPs, both in listed and unlisted companies. In listed companies, the trend typically involves a vesting period of 4 years, with a slight variation to 3 years. The exercise period ranges between 2 to 4 years. Similarly, unlisted companies follow a similar pattern with vesting periods typically spanning 4 years and exercise periods falling within the 2 to 4-year range.
When determining the value per option, different approaches are employed in listed and unlisted companies. Listed companies commonly utilize the fair value of options and incorporate calculations based on future appreciation to assign value to the options. On the other hand, unlisted companies often rely on a combination of fair value of options and the market price at the time of grant as the primary methods for deciding the value per option. These approaches allow companies to establish a fair and reasonable value for the options granted within their respective contexts.
Eligibility of RSU and ESOP for Advisors and Consultants: Domestic and International Considerations: When it comes to issuing RSUs (Restricted Stock Units) and ESOPs (Employee Stock Ownership Plans) to advisors and consultants, there are specific eligibility criteria and considerations. In India, it is generally not common to provide RSUs and ESOPs to advisors and consultants. However, if the companies are incorporated outside of India, they may extend these benefits to advisors and consultants. In such cases, the eligibility to receive RSUs and ESOPs is contingent on the company's jurisdiction and its specific policies. Alternatively, for advisors and consultants in India, companies may opt for cash-based plans that provide the value of the shares but do not grant ownership or equity participation. This approach allows companies to compensate advisors and consultants while adhering to local regulations and practices.
In this insightful conversation with Rahul, several key trends and practices surrounding Employee Stock Ownership Plans (ESOPs) were discussed. The approach to obtain survey insights and the methodology employed by ESOP Direct and Qapita were highlighted. The conversation delved into various aspects, including the objectives of implementing ESOPs, coverage of ESOPs across industries, the use of different instruments like ESOPs, RSUs, and contribution plans, as well as the determination of exercise price and grant practices. Additionally, the discussion touched on market trends, ESOP pool sizes, vesting and exercise periods, value per option decisions, and the eligibility of RSUs and ESOPs for advisors and consultants. These insights shed light on the evolving landscape of ESOPs and provide valuable guidance for companies seeking to leverage employee ownership as a strategic tool for growth and retention.