Benefits Of ESOP For Employees in India

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Benefits of ESOP

Introduction

Offering ESOPs to employees outside of leadership has grown common, driven mostly by making them stakeholders, they desire to recruit and retain top personnel in relatively young organizations, particularly startups or tech firms.

 Employee stock option programs (ESOPs) have surfaced as the most current strategy for attracting and retaining talent at all levels, with a rising number of ESOP companies offering this option and announcing buybacks in the recent past.

During the epidemic, Indian corporations spent nearly 2,500-3,000 crores yearly on ESOP buybacks.

According to industry experts, selling ESOPs to employees outside of leadership is largely motivated by the need to recruit and retain top personnel in very young enterprises, particularly startups or tech firms.

“ESOP buybacks are also utilized to recognize and reward employees for their contributions, particularly in organizations that saw remarkable growth during the Covid-19 epidemic.” “Because most millennial and Gen Z employees prefer rapid career advancement and achievement, these organizations become more appealing employers compared to their competitors,” says PS Viswanath, MD & CEO, Randstad India.

“Employee-ownership programmes have played a very important role in emerging organizations, and stock options allow employers to compensate the employee for accepting the risk of joining a growing company,” he continues. As startups get government stimulus funds and large-company capital, businesses may utilize stock options to make employment offers more attractive while allowing employees to esop share in the company’s future success.

Summary

According to Viswanath, this keeps people involved in an organization’s progress from which they may gain. “This technique is gaining traction in India, with employees now choosing a remuneration structure with a greater ESOP share (approximately 30-50 per cent) rather than a cash component.” Consequently, the employee’s wealth creation opportunities multiply, increasing their performance. “This is a win-win situation for ESOP companies since they can make these essential employees stakeholders of the organization while also securing a long-term retention strategy for top personnel,” he says.

ESOP: How does it work?

Vivek Gulati, Co-Founder and COO of Grip, a digital platform for new-age investments, believes that ESOP is one of the most effective techniques for rewarding and retaining employees.

“It is the ideal approach to show employees that they have contributed significantly to the organization’s success.” It also symbolizes the company’s aim to invest extensively in its people and help them develop alongside it. 

“ESOPs serve three vital functions: creating long-term wealth for workers, rewarding employees and making them part owners of the firm, and last, assisting a company in long-term employee retention,” he adds.     

Gulati believes that producing liquidity events from time to time as part of the retention plan offers all workers a transparent understanding of the wealth they are building and allows them to enjoy the company’s success in a shorter time frame. Grip completed its first ESOP repurchase within 18 months of its establishment and had a tremendous reaction from workers, with the majority of eligible employees choosing to remain invested in the firm.

“ESOPs assisted us in increasing employee ownership since the options make our employees part owners of the business, and the development is driven by them acting as our partners.” “There is a group sense of accomplishment as we celebrate our triumphs together, which also helps generate improved productivity,” Gulati explains.

Benefits Of ESOP For Employees

ESOPs: Monetary Benefits

According to Akshay Munjal, founder and CEO of Hero Vired, employee stock ownership plans ESOPs are an excellent instrument for wealth creation and help employees establish a stronger feeling of belonging to the firm.

“It also aids in attracting and maintaining top people in a thriving economy.” Individual employees can profit from a firm’s development over time and feel a feeling of ownership since ESOPs give them a stake in the company. Employee morale and confidence in the organization improve when employees have a stake in the firm for which they work,” he says.

Hero Vired, which just unveiled its ESOPs effort for teachers, claims to be the first Edtech business to offer an ESOP programme within the first year.

“We feel that faculty are the backbone of a learning firm like Hero Vired, particularly where the emphasis is on live instructor-led sessions.” They are ecstatic about the possibility of creating value and money that we provide them. “By concentrating on outcomes, we bring an entrepreneurial attitude to the jobs while also instilling curiosity and a sense of winning together,” Munjal explains.

Motivating Factor for Employee Performance

Various studies suggest that capital-sharing structures, such as ESOPs, may help employees feel more encouraged and happy, motivating them to work and remain with the firm for longer than they would otherwise.

“In 2021, the ESOPs repurchase by Indian startups was close to $450 million, the biggest for India to date.” This demonstrates that ESOPs are becoming a popular option for businesses and are well received by employees,” 

-Mrinal Sinha

For the past four years, CARS24 has maintained an annual ESOPs buyback programme, which Sinha says “has enabled us to give back to our employees in every imaginable.” While ESOPs are included in an employee’s CTC, they benefit both businesses and employees.

ESOPs might be the deciding factor in talent acquisition for firms. Here’s how it’s done:

Finding Exceptional Talent

When funds are scarce in the early years of a company, ESOPs aim to fill the void by compensating employees. Employees that believe in the industry’s development potential accept ESOPs as part of their remuneration package to purchase the company’s ESOP share price at a lower cost. This aids in the acquisition of strong personnel at a lower initial cost.

Boost Employee Ownership

Employees are self-motivated to put forth their best efforts for optimal productivity when they participate in the company’s ownership. After all, the higher the profitability, the higher the stock value of the firm and the larger the earnings that employees may make. 

Retention of Employees

Employee stock ownership plan ESOP aid in employee retention. Employees choose to stay with the firm to cash in their stock options after the vesting period because they can only do so after the vesting period. This improves retention while lowering attrition rates, which may be frighteningly high in the technology industry.

How do ESOPs Assist Employees?

ESOPs benefit employees for the following reasons:

Earnings Growth at a Slower Pace

They let workers obtain appealing stocks at a cheaper cost. Employees can either hold these stocks for long-term profits or sell them at a higher market value to profit from their stock ownership.

A Second Income Stream

Employees who become shareholders have voting power in the management of a firm. In addition, they receive dividends on their stocks, which offers additional income.

Job Security

Due to the vesting period, employees also get job stability which, in turn, drives up employee satisfaction.

What else should employers know about ESOPs before making a decision?

Though ESOPs can help businesses recruit top talent, especially in a down economy, there are various aspects to consider before issuing them to employees. To begin, various legal standards and laws govern the operation of ESOPs. Businesses must follow all rules to handle ESOPs effectively and avoid non-compliance fees.

Furthermore, outsourcing ESOP governance and internal monitoring incur significant expenditures. Employers must thus consider the cost structure when integrating the notion of ESOPs into their organization. 

Warning Sirens

One key stipulation many unlisted firms put in their ESOP contracts is that employees cannot sell their equity to outsiders unless the promoters agree.

“As a result, it is recommended that organizations were issuing ESOPs select a vesting time that best meets the interests of the company while rewarding the employee for his/her effort.” However, companies must guarantee that their shareholders are adequately paid, particularly if they are new to the firm,” 

-Viswanath 

According to Mrin Agarwal, founder and director of financial education service Finsafe, “often, I find workers choose short-term income over long-term rewards, which may lead to turnover.” In my seminars, I find that participants are unaware of how ESOPs or taxation (ESOP tax in India) function and to want to cash out immediately. Employers must focus on educating employees on all elements of ESOPs so that they can properly evaluate long-term possibilities.”

Conclusion

Since January 2020, ESOP companies have provided $700 million, proving that ESOPs are here to stay. However, employers must recognize that providing attractive perks isn’t the only way to keep employees happy and satisfied. The most important benefits for retaining talent are on-time salary and incentive payments, professional advancement opportunities, and trustworthy staff medical insurance. For more about ESOP taxation and ESOP tax calculator, kindly visit our website MUDS Management.

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