FREE online courses on ESOP - Understanding ESOP - Stock Plan

 

The objective of improving the employee commitment and ownership is a universal one though difficult to achieve as:

• A stock plan by itself cannot guarantee employee commitment, it can be stated that it would be a strong input in the process.
• There is hardly any substitute to this input and the decision here should be on the basis of the cost-benefits of such a plan than any misgivings about the objective itself.
• There are sufficient indications that employees who have stock options in the company evince greater concern than those without, for the company‘s performance in the stock markets and media.
  

The object of creating employee wealth has been achieved well in a few firms in the I.T. sector. In India, it is reported that Infosys, Wipro and ZEE have created dozens of millionaires through the stock plan route. However, the expectations connected with this objective also carry a serious threat of disenchantment under adverse conditions of capital markets and corporate recession.  It is known that most of these companies did not have the objective of creating a windfall for their employees as primary but appear to have stumbled into that prospect.

 

Objectives

• Stock plans can be fitted well as an additional retrial / social security measure in combination with other objectives.
• As most schemes have a vesting period and are also tied with grade levels and length of service, they serve similar purpose as social security benefits for those who are nearing retirement. The public sector companies have designed models that appear to have social security as an objective in addition to others.
• There are also schemes that link savings plans with acquisition of shares in the company. The scheme by the MUL, which has been advocated by the DPE, appears to be close to this objective.
• The fund created for the purpose from employee savings and employers' contribution may be used for acquisition of the company shares or other shares.

 

Industry practices in compensation designs have been undergoing major changes and these are being aimed at attracting and retaining special talent.  In this context, insular / rigid policies will bring about a serious barrier for entry of important skills, in addition to the flight of current talent.

 

The sheer progress of stock option plans in other countries and the competitive sectors in the private fold in India must be seen as precursors.  It is a fact that certain skills are far higher in market value than the others.  This market differentiation has no connection with perspectives of internal equity or the traditional job evaluation.  Though markets may go through the cycles of valuing some skills unreasonably high at one time vis-à-vis others, this differentiation needs to be acknowledged by the corporate. Equity is a dynamic and relative concept and employee perceptions change depending on one's current position / interest than by any specific logic.  Thus, several companies are establishing stock option plans both to attract highly valued skills as well as to retain the existing ones. The success of the plans in actually attracting or retaining talent is rather difficult to validate. The reason is that if all the competing companies have stock plans then the values implicit in the plans, become more important than the existence of the plan itself. At the same time, when several companies have stock plans, the existence of the plans become important as a hygiene factor.