ESOP Growth Rate - How Well is it Working?

An Employee Stock Options Plan is an effective compensation strategy to retain deserving talents in an organization. Companies embracing the plan have shown remarkable resilience in recent years. But how has the growth rate been ever since ESOP was launched for employers and employees? Is it really beneficial to the Companies as it claims? The pandemic in 2020 has brought down the business demand by 56% globally. What difference did companies with such employee ownership make in such a situation? Let's try to answer these questions and have better perspectives on the employee shares option.

What is an ESOP?

ESOP is a corporate strategy adopted to encourage skilled employees to continue working for the business. It allows employees to take ownership of the company shares as long as they stay. It is also an effective retirement plan for employees with long-term experience in the company. After serving the required vesting period, the shareowners can exercise their right over the options. The companies also use it to raise more equity capital effectively. The benefits are open to not just the employees but also the directors and consultants of the firm.

Growth of ESOP

According to an NCEO report, 2019 saw the establishment of 239 new ESOPs in the US. These schemes have a coverage of over 46,500 employees. Manufacturing businesses and Science and technology services are the top industries adopting ESOP. A total of 6,482 ESOP plans with a coverage of over 13 million participants have been reported. Out of these 10.2 million participants are present employees.?

The evolution of ESOPs has seen an increase in startups taking up the employee shares plan as a compensation strategy. The buybacks of share options have proved beneficial for Indian employees by generating $159 million, An Inc42 report says. New companies (4-7 years old) have been keen on adopting ESOP mechanisms in comparison to decade-old companies. This is because of the growing demands from the Millenials for better compensatory benefits and security in the workplace. There has been steady progress in ESOP announcements from companies across the world since 2011, though there was a slight drop in the number of ESOPs during the pandemic.

In June 2022, Capgemini launched its ninth ESOP batch covering almost 97% of the employees, in its annual general meeting. The 3,500,000 shares options offered to the employees constitute 2% of the outstanding shares. Thus the employee shareholding now accounts for 8% of the total share capital. The initiative is done with the view of involving employees in the performance and development of the company.?

How efficient is ESOP today?

ESOP has been up to drastic growth since its first launch in the year 1974. The past decade has seen better awareness of ESOP among companies and the public. The prime purpose of ESOP today is to serve as a better exit strategy for business owners and an incentive alternative for employees. Let's find out how well ESOP has been working in recent years.?

ESOP in sales

A Rutgers study reports that ESOP has contributed to a 2.3- 2.4% increase in the annual sales rate. It has also shown a visible 2.3% progress in the employment growth rate. The sense of ownership that the plan offers has resulted in increased productivity among the employees, which in turn has caused the organization's overall profit generation. A GAO study claims a 52% increase in productivity among employee-owned companies than others. Another NCEO research shows a 33% income gain in employee-owned firms and 92% better household wealth among those employees.

ESOP and employee wellness

The adoption of an employee stock plan has contributed to fewer layoffs in companies than those with no such plan, even during the pandemic layoff chaos. They serve as a better investment strategy for the employees than paid compensation. ESOPs are one of the best retirement securities for a staff. A recent study has found that Indian employees working for startups have made over $150 million through buybacks. News like these across the world make ESOP more tempting despite the exhaustive legalities and documentation.?

ESOP and employee engagement

Recently, Swiggy offered its employees the opportunity to liquidate their stocks back to the company. Activities like these spike up the engagement rate of the employees to be associated longer with the firm. Uber, which had restrictive stock option policies for their employees, is also considering more staff-friendly policies in the future. Increased profit in their stock ownership means increased reasons to stay and work harder for the employees, thus contributing to increased personal wealth. Also, the motivation that ownership gives is enough for the employees to generate more revenue for the company as they feel responsible and involved.

ESOP and employer benefits

As already mentioned ESOP serves as a better exit alternative for employers. Gone are the days when businesses were handed down to a family member through generations. Instead of selling their companies to a third party at a later stage, the owners can leave them to the employees. They can still be a part of the business through stock options. Also, in an era where staying in a company for more than 2 years is looked down upon as a professional blunder, ESOPs will help retain skilled employees without regrets.?

Summing up

Now that you have a clearer picture of what goes into the evolution of ESOPs, it's time for you to decide if it's the best for your business. The trends discussed here show a potential increase in the awareness of ESOP better in the future and employers must evaluate the needs and effects of offering share options to their employees. Eqvista can customize employee share plans according to the requirements of your business operation and employee expectation. If you are planning to set up the best ESOP strategy for your employees, you should consider talking to our expert consultants.