Equity based compensation in any form or shape is relatively complicated to understand and also difficult to communicate. However, that precisely is the reason why communication is key to ensure its success. For good reason, globally companies earmark a significant budget for Plan communication.
Communication in every form is crucial for the success of any Plan for several reasons.
- Every form of equity compensation is inherently linked to hard core financial elements – Operations, Profitability, Balance sheet, ratios, stock markets, business cycles. These are not subjects easily understood by most of the Options holders. If their reward is going to be linked to these aspects which they do not understand, it often leads to an impression that ESOPs are a lottery.
- These are long term instruments, requiring consistent year on year performance from employees. Unless employees know how well is the company doing on an on-going basis, they may be in the dark and make impressions based on grapevine.
- Given macro and micro economic fluctuations, it is likely to have a bad year or two in the ESOP vesting period, leading to decline in the business valuation and deferment of value appreciation. Unless these trends are communicated effectively, Option holders may carry an impression that Valuation is a black box calculation which only select few decide.
- By giving Equity of the Company you are making the Option holder a partner in business. It is important that he not only knows that he is a partner but also feels like one. There are instances where just on receiving Company’s Annual Report, Option holders and their families have felt proud and delighted. Just an experience of a CEO of the Company, talking to you on an Annual basis giving you heads up on how is the Company doing, in itself is a very motivating feeling and brings everyone on par as shareholders.
Companies can communicate through banners, fliers, townhall meetings, Plan handbooks, FAQs. Send reminders, alerts about vesting, end of exercise period, potential lapsing of Options. Periodical communication on value of the Options held based on latest independent valuation is also essential.
A very common, communication need is when the Company is raising Capital rounds and Option holders read about the valuations in the media. This creates expectations that if one were to exercise and sell the shares, they would realize that value. This expectation needs to be addressed.
Corporate action, especially in the nature of Change in Control, often results into a situation where investors get an exit and realize their appreciation, the Option holders are often expected to continue with their Options by the incoming investors. Open and transparent communication apart from a fair treatment is extremely essential to uphold the spirit with which Options were given to employees.
Global research shows that almost a third of the Options granted, lapse. Employees leave their jobs keeping lacs of Rupees in value on the table. Lack of education and awareness is one of the prime reasons for this behavior. Effective communication plan can go a long way in reducing this gap and ensuring better impact of the Plan.