While the key objective of running a company is to secure profits, there has been a slight shift in how organisations prioritise their key goals. Today there has been much-needed attention paid to the wellbeing of employees and how they get incentivised for the work they do. One innovative way that has been gaining popularity over the past decade is – Employee Stock Options (ESOPs).
ESOPs offer employees ownership interest through profit-sharing plans or direct stocks. This gives eligible employees a sense of ownership and motivates them to work towards the organisation’s growth and success. This is all the more popular in the startup space where employees are often offered stock options in return for high salaries. This reduces the total cash flows, minimising the strain on the limited resources available.
In a report by Rutgers Institute, companies with ESOPs tended to outperform companies with more traditional employee incentive programs. This has been especially true during the COVID-19 pandemic when ensuring the well-being of employees became a hot topic of discussion especially with rampant layoffs and pay cuts.
The report also suggested that ESOPs in place took better care of employees and their livelihoods when compared to their competitors. According to the Rutgers Institute, companies with ESOPs were 3.95 times more inclined to retain their managers in relation to their competitors. Another interesting finding from the study suggested that only 26.9% of the total companies with ESOPs had declared pay cuts when compared to 57.3% of other firms with no ESOPs who had imposed pay cuts.
Employee retention has been cited as one of the key reasons for rolling out ESOPs. By actively involving an employee in a company’s growth, both employees and employers are aligned in their mission and driven to work towards the company’s success with the promise of a future payout. This also opens up the window for employees to be involved in key discussion-making events, giving them a feeling of ownership that is not just on paper.
ESOPs also help during transitions, mergers & acquisitions, and economic turmoil, like the one we witnessed in 2020. Companies with ESOPs in place usually see fewer layoffs because employers would typically have to pay their employees at the time of termination. This in turn creates a resilient company culture that helps organisations wade through troubling financial circumstances. This also helps increase a sense of job security and trust in the minds of employees.
ESOPs are far more popular than you might have imagined. In a survey conducted by KPMG, 68% of companies with ESOPs that were contacted had 10 years of operating experience and about 31% of the companies had an employee base that exceeded 2,000. This goes to show that while the trend has set in strong with startups, even longstanding, legacy companies do recognise ESOPs as part of their compensation strategy.
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