FREE online courses on ESOP - Understanding ESOP - Objectives Of ESOP
The objectives of stock plans have been multiple and
diverse. In some instances, while the initial objectives could have been one
type there could be emergent objectives consequent to internal and external
changes either replacing / modifying the initial objectives or adding to them.
For instance, some plans were started as an incentive mechanism for the top
team but slowly enlarged the scope to achieving commitment and loyalty among a
large population in the company.
The objective of one-time preferential offers (like
the 200 shares of the yesteryears) is primarily to:
Pass on the benefit of possible capital appreciation on a firm basis
to employees.
In the process, it widened the employee ownership of the company
immediately on the one hand and possibly, saved costs in divesting
this lot to general public.
The object of widened employee ownership, if that indeed is
the case, is not necessarily achieved if the employees traded the stock through
innovative mechanisms during the lock-in period or soon after its conclusion. It
is in this context that some companies look to re-loading the employees every
few years with fresh allotments. In sum, such type of offers which do not
discriminate employees on the basis of job worth or performance or skill-premia
do not achieve objectives which may be more central to the philosophy of stock
options.
The philosophy behind stock plans:
Aim at
promoting the corporate performance on a sustainable basis
Improve
shareholder value through increased market rating of its shares.
In the absence of these, stock options may actually be
substitutable by other types of instruments or methods.The very fact that share prices are the
locking mechanism for estimating the benefits underscores the predominant
objective of increasing the shareholder value.
Even in the case of unlisted companies, the aim is to make
the employees enhance the internal worth of the company in such a way that the
valuation would be high when the company eventually goes for listing.
Most stock plans have one or a combination of the following
as objectives:
Employee commitment and a feeling of ownership
Creating additional wealth for employees.
To
supplement retirement / social security benefits.
To
attract talented / highly valued professionals or scarce skills. Especially
if it is the industry norm (i.e., to ensure that absence of stock option
plan is not an entry barrier).
To
retain employees or specific skill groups among them, in the face of
apprehended high turnover.
To improve relations with Collectives and pursue common corporate
targets.
As a possible hedge against hostile controlling interests /
takeovers (in future).
To introduce a Performance Management System without incurring
full cash outflow and/ or
lessening possible individual differences in the immediate cash
bonus.
