How do ESOPs help in retaining employees?

ESOPs as a part of compensation strategy, have multiple objectives to achieve. These not only help in creating wealth for employees, but also, align employees’ objectives with the Company’s overall goal and help in retention.

In the current dynamic business environment, it is essential for any organization to retain key talents in the eco-system. Retaining the talents in early stages helps company save time and resources on recruitment and training. As each organization has a different work culture, methodology – retention of key talents ensures limited allocation of time and resources on developing the resources which would be higher in case of higher volatility in employee movement.

ESOP is one of the critical tools which ensures retention of the employees in any organization. As a tool there are multiple ways in which ESOPs can be modulated to achieve the objective of retaining the key talents. Below are some ways in which ESOPs can ensure retention:

1. Grant Frequency – Instead of having bullet or one-off grants, Company can grant options at regular intervals to ensure retention of key talents;

2. Vesting Schedule – By spreading the vesting schedule over the relative business cycle of the Company the intended objective can be achieved at least up to completion of the business cycle;

3. Vesting Conditions – In case, vesting could not happen in a particular year due to non-achievement of performance conditions, and there is a leeway for catching-up the lost vesting in one or more subsequent vesting year(s), it urge for retention to win the lost vesting.

4. Linking exercise to a liquidity event and allowing higher benefit for serving employees – If the exercise of options is linked to a liquidity event with a structure of higher benefit for the then serving employees, retention of key talents can be ensured at least up to liquidity event due to possibility of a higher wealth creation vis-à-vis a former employee will only happen at the trigger event and usually the option grantees have the visibility to the liquidity event.

These, though not exhaustive, but are some of the prominent methods to retain the key talents and ensure congruence of individual objectives with the overall goal of the Company.

Having discussed above, it is also important to understand the significance of tweaking as discussed above because, as every coin has two sides, these parameters may have Accounting / Legal and Tax implications on the Company. Having said that, to conclude, ESOPs can definitely ensure retention of the key talents among other objectives and a Company needs to implement a thought through ESOP Scheme basis the objectives without sticking to a templatized structure.