Employees Stock Ownership Plans

Employee stock ownership plans originated in the USA in early 90s. Such plans have not gained popularity in India till recently, due to the absence of legal provisions in the Companies Act covering stock options. However, in 1988, the Government has allowed stock options to software professionals, recognising the importance of retaining talent within the country.
Under employee stock option plan, the eligible employees are allotted company’s shares below the market price. The term stock option implies the right of an eligible employee to purchase a certain amount of stock in future at an agreed price. The eligibility criteria may include length of service, contribution to the department/division where the employee works, etc. The company may even permit employees to pay the price of the stock allotted to them in installments or even advance money to be recovered from their salary every month. The allotted shares are generally held in trust and transferred to the name of the employee whenever he or she decides to exercise the option. The stock option
empowers the employee to participate in the growth of the company as a part owner. It also helps the company to retain talented employees and make them more committed to the job.
Employee stock options are welcomed everywhere due to their in-built motivating potential.
Some of the powerful benefits offered by Esops may be catalogued thus:
i. Stock options are a tremendous motivator because they directly link performance to the market place. The underlying rationale is to let employees add value to a company and benefit from it on the same terms as any other provider of riskcapital.
ii. Employees remain loyal and committed to the company. To become part owners, everyone has to stay for a while, contribute their best and then share the resultant gains according to an agreed criteria. Stock options motivate people to give their best to the company because individual performances will translate into share price increases only if it is part of a larger collective effort.
iii. By transforming your employee into a stockholder, stock options foster a long-term bond between the employee and the company. Employees begin to look at themselves as real owners in place of just paid servants of a company. ESOPs give employees a ‘piece of the action’ so that they can share in the growth and profitability of their company. Everyone also loves the concept of employee ownership as a kind of “People's capitalism.”
iv. ESOPs underscore the importance of team effort among employees.
v. Better industrial relations, reduced employee turnover, lesser supervision, increased
dividend income, etc., are other incidental benefits.
ESOPs have their critics as well who attack the method on the following grounds:
vi Only profitable companies can use the tool
vii Stock prices do not always reflect fundamentals
viii Falling share price could mean losses for employees
ix The inability to cash in quickly can dampen interest
x Lack of transparency can earn accusations of favouritism
Employees' sharing the platform with owners, evidently, can be a disadvantage because they may feel 'forced' to join, thus placing their financial future at great risk (e.g., employees who opted for ESOPs during the software boom in the late 90s have suffered huge losses when stock prices crashed subsequently). Another drawback is that ESOps could be used by managements to fend off unfriendly takeover attempts. Holders of stock options often align with management to turn down bids that would benefit outside shareholders but would replace management and restructure operations. Surely, ESOPs are not meant to entrench inefficient management. Despite these disadvantages, ESOPs have grown in popularity in recent times.
Practices in Indian Organisations Companies like Mastek, Godrej and Boyce have tried to link their rewards to team based performance in recent times quite successfully
Team-based rewards: Best practices
i. Set quantifiable targets when evaluating team performance for rewards.
ii. Ensure that top performers in each team earn the highest level of rewards.
iii. Link team performance closely to the company's profits and overall financial health.
iv. Avoid subjectivity when assessing both the team and its member's performance.
v. Offer uniform non-team based incentives to employees within each grade.
Other companies like Pfiger, Siemens have been linking rewards to shop floor workers
based on the worker ability to meet productivity as well as performance targets. In any case, the emerging picture is quite clear especially in the post liberalisation era in India. The start that need entrepreneurial action from its employees will have to offer large
doses of cash, goal linked incentive pay and possibly stock options to link compensation to profits. Mature companies, whose focus is on managing their earnings per share and protecting market shares, will have to seek out managerial talent and reward it with flexible tax-friendly compensation packages with benefits designed to improve the quality of working life.

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