Can I Use ESOPs as a Performance Bonus?
The short answer — YES!
Not many HRs have fully utilized ESOPs but those that are on top percentile have been actively using ESOPs as a performance bonus. ESOP is not just about “doing it for the sake of distributing it” but to also to gain maximum impact of it (both retention and company’s growth).
How to use ESOP as a Performance Bonus?
in the What is an ESOP article, we discussed about the terms- one of it, is a vesting schedule. vesting is a trigger when an allocated ESOP is assigned to employee. There are ways of setting up your vesting trigger. One of it- is to use performance milestone. so rather than simply put “4 years vesting”, you may design ESOP as follows:
Employee Name: Arnold Schwarzenegger
Company Name: Terminator.io
Employee Stock Option:
- Total Shares: 200 shares
- Vesting Period: Performance based
- Vesting Schedule: Vested upon achievement
- Cliff Period: N.A.
- Exercise (or Strike) Price: $1 / shares
With this kind of design, you can incentivize employee performance accordingly and in-scale with their contribution to the company!
What if the company needs to change the metrics or the number of targets?
Once share is vested, you will not be able to retrieve it (just like the bonus that you have paid, there is no way you can ask team to return the money). However, for the following target, yes you may be able to change it and update it as needed — while making sure to have full confirmation and acknowledgment from your employees.