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Learnings

Most of the time, businessmen unable to understand ESOPs, and why their employees are leaving them despite giving them several benefits.

Employees leave a company because

  • Determine how they can earn wealth by working in the company.
  • They are not able to see how they are becoming part of the growth of the company.
  • Giving their time and effort to the company but not getting anything in return.

It may possible you are not making your employees the part of your growth while the employees are going things to be part of your growth.

This is a gap of expectation between the company and employees. You can fill up this gap using a tool, ESOP ( Employee Stock Option Plan )


# 1 What is ESOP?

ESOPs

ESOP means giving some shares of the company to your employees because they are available to you whenever you needed whether it is the day, night, a holiday, or a festival. They work with the same dedication as you do for your company.

Though they neither make an investment in your company nor take a financial risk, they have invested their efforts and time in the company 

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# 2 Distribution criteria for ESOP

ESOP is given to the employees based on the following two criteria:

1. Performance

If an employee has joined you only one year back but he/she has increased the profit tremendously by impacting either the revenue or the cost of the company, then he/she is a high – performer. So, you can give them ESOPs

2. Longevity

Some people are working with you from the start of your business or for a very long time. They stand with you at the time of crisis or bad times for the company. You can honor these people by giving ESOPs.


# 3 Defer Cash Flow

ESOPs

If an employee asks you for a benefit or incentive of Rs . 10 lakh cash because he/she has worked very hard for the company and increased the profits as well, then giving him / her this cash amount will affect your cash flows.

In such a case, if you offer him / her shares of Rs . 15 lakhs of your company instead of Rs . 10 lakh cash, then this will help you to defer your cash flow and retain your employee.


# 4 Increase Employee Contribution

Once you give ESOPs to your employees, then they start contributing in the growth of the company because the employees know that if he/she wants the value of the shares received by him/her, then he/she has to grow the company by increasing more profits for the company.

So, the employee will work more dedicatedly for your company as it is his own company.

Thus ESOP helps you to defer the reward an employee and can increase his / her contribution to the company.


# 5 Impact Employees

Life For instance, if the employee remains with you for 4 years and your company’s value becomes 10 times in these 4 years, then the value of shares of Rs 15 lakhs has also increased to Rs. 1.5 crores.

This Rs. 1.5 crores can bring a very big change in the employee’s life like the employee can buy a house, repay the home loan, invest in the studies of his / her children, buy a car, go on a foreign trip, or can live any of his / her other big dreams.

Let us take some case studies to understand how ESOP can Impact the life of an employee.


# 6 Case Studies on ESOP

Person Holding Pen Pointing at Graph

1. DMart

  • DMart is a big successful retail company with a market capitalization of Rs. 1.75 lakh crores.
  • The CEO of DMart is Mr. Ignatius Navil Noronha. He has joined the company in 2011. He received ESOPs from the company and he constantly performing well and received more ESOPs from the company. Today, he has 2.1 % shares of the company and the value of these shares is Rs 3000 crores.
  • He is not the owner of the DMart; the owner of DMart is Mr. Radhakishan Damani and his son Ramesh Damani. Mr. Ignatius Navil Noronha is the CEO of the company and the value of his shares is Rs . 3000 crores. If he remains with the company and the value of the company becomes double, then the value of his shares will become Rs. 6000 crores.
  • So, an employee who cannot make his business but he is a good employee and he has increased the value of his promoter and the company. Along with this, he has created wealth for himself through ESOPs.

2. Flipkart

  • Flipkart employees have 6 % shares of the company. So, when Walmart purchased Flipkart for $ 21 billion, then 6 % of $ 21 Billion, I.e. $ 1.2 Billion or Rs. 9000 crores shares are with the Flipkart employees.
  • Some of these employees have more shares than others based on their performance or longevity with the organization.

3. Infosys

  • The drivers and electricians who are with Infosys from its starting have Rs . 20-25 lakhs share with them.

4. Razorpay

  • Razorpay, a payment gateway company, has recently bought back the ESOPs of 400 employees.

5. Car Dekho

  • CarDekho has also bought back the ESOPs of worth $ 3.5 Million or Rs . 25 crores from their employees.

6. Meesho

  • Meesho has bought back the ESOPs of worth $ 1 Million or Rs. 7-8 crores from their employees.
  • So, these are some of the companies where employees have created good wealth by working with some good companies.
  • Entrepreneurs and businessmen are also benefitted as these employees have grown their companies.

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# 7 ESOP Process

Though you need a consultant to implement ESOP in your company, here  Mr. Sanjay Kathuria explains some of the basic things about the process of ESOPs so that you feel empowered while talking to the consultant.

Steps in the ESOP Process:

1. Create a pool of ESOP

It means to decide the percentage of ESOPs in your company shares

For example:

  • If your company has 100 shares and you have decided that 5 % of the shares will be given as ESOPs to the employees, then 5 % is the pool of ESOP
  • Among these 5 % shares, you will decide which employee should be given more shares and which will be given fewer shares based on their performance and longevity with the organization

2. Grant

Once you have decided the percentage of share you will give to an employee, then you need to provide him/her a grant letter,

For example,

  • You have decided that you will give 1 % shares of the company to your CEO, then you should provide him/her with a grant letter, inform him about the ESOP, and ask him/her to stay with the company.

3. Vesting

Vesting will depend either on the performance or longevity of the employee with the organization.

For example,

  • You can tell your CEO that you want him/her to be with the co any for a longer duration. So, you will give him/her this 1 % share in the following sequence: 0.25 in the first year, 0.25 in the second year, 0.25 in the third year, and 0.25 in the fourth year.
  • This helps you in retaining your CEO as he/she knows that he will get 1 % shares of the company after 4 years. In such a case, if the company’s value becomes Rs. 100 crores in the next 4 years, then the CEO will have Rs . 1 crore shares. So, the CEO will not leave you.
  • If you are a small company, then you may have to do vesting in months instead of years as you are not getting the required manpower.

For example:

  • Initially, OYO did not have the manpower. So, they started issuing ESOPs every month to their employees.
  • Once you have decided the amount of share you will give to an employee, then you need to decide:
  • In how much time will you give the shares to your employees like next month, next year, next two years, or the next three years
  • In how many times you will give the complete shares to your employees like complete share in one time or half shares after a year and a half shares in the next year
  • If you tell your CEO that you will give him/her the share in the next 10 years, then he/she will not remain with you because 10 years is a very long period. However, if you give the shares in 3-4 years to your CEO, then you will be able to retain him/her.
  • 4. Strike Price of ESOP

Suppose the value of your share is Rs . 500 in the market. However, if your employee purchases the share, then it will cost him / her Rs 10 only. This Rs. 10 is the strike price.

Expand your business because your employees want to increase the value of their shares

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