How ESOP Binds Employees to an Organization and Boosts Their Wealth Creation Along with the Security of Salary

According to the National Center for Employee Ownership, as of 2022, nearly 6,500 employee ownership plans have been issued. With our plan, announced on 01 January 2022, we joined the league. But, why?

Here’s our rationale!

What Led to ESOP?

In the past two years, the pandemic has taken a heavy toll on the global job market and infused a lot of uncertainties among both employees and employers. Many firms who were unable to touch the breakeven, continually struggled to fulfill the expectations of their employees. This introduced a gap between the employees’ expectations and companies’ delivery. Moreover, a lot of A-players started leaving their organizations in search of better options. In such critical times, witnessing the majority of the true assets of a company resigning increases the attrition rate. This rate obviously reduces a firm’s productivity, but the alarm bell rings when the existing staff starts to second-guess their choices. Under the juggling to cope with the market ups and downs and employees putting their papers down, the firm squirms under instability. As a panacea to this condition, most firms give a deep thought to how to handle such a situation. Some devise an engagement plan, whereas others strategize a permanent fix. To tackle or avoid such a situation, many firms have turned to employee stock ownership plans, and Ergode is one of them. We felt a need to appreciate our members for the effort they have been putting into the building and growing brand Ergode for a long time. While making the decision now helped us blend with the current trend, the approach set us apart. However, as an owner of a thriving brand aggregator, the concept was a fresh subject for me. After months of reading and brainstorming with my apex, I knew this deal would be ideal to reduce attrition and provide employees with a sense of security.

The Perks!

Just a scroll above, I threw light on how the changing market and situation have caused insecurities in the minds of employees and firms. If I decide to sum up almost every firm’s condition through an equation, then it would look like this – 

Attrition Rate > Employee Retention Rate

Ever since the term was coined, the ESOP pool has been an effective way to retain employees. Interestingly, for many firms, choosing the stock option plan for all employees has always been the best rationale to reverse the above equation. It all starts with building and communicating the bigger picture to the employees. In simple words, before announcing, a firm needs to brand its ESOP to its stakeholders, especially employees. 

Through this branding, employees must believe in the idea of the stock option and make a practical decision to opt for it (if it’s not kept mandatory by the firm). For this, a firm needs to show the comparison between the returns an ESOP carries and fixed CTC. 

In order to convince clients, they need to demonstrate that the salary of an employee with no ESOPs is fixed and does not shoot up when the market is profitable. It increases only in the case of their annual increments. As they are left with no passive earning, their hands remain tight in terms of spending, limiting their ability to travel overseas – which I would love to do or plan anything beyond retirement! When ESOP enters the picture, it comes as a reward for the employees for their hard work and years of hustle in a firm. Apart from the fixed compensation, employees get a chance to earn more. They can acquire the shares of the firm at a nominal rate and sell them after a defined tenure. Even in many cases, a firm enables “open ownership” to all the employees. Under this, employees with stock options have the right to participate in a firm’s decisions. Once employees get to know these objectives behind an ESOP, they realize that the firm values them. The moment this happens, employees develop trust in the firm and convert into loyal employees. They admire the fact that their firm is there to back them up in case of any emergency. Therefore, they stay with the firm until retirement.

To Be Continued….

In spite of the fact that many big-shot firms have chosen ESOP, many CEOs and brand owners are contemplating and are reluctant to opt for ESOP or not. In my experience, CEOs and owners perceive ESOP as an engagement plan and see it as a way to foster a positive work environment. They find ESOPs to be complex mechanisms requiring several compliance costs. Hence, they decide not to follow the complication and simply stay intact with their engagement plans to build a brand’s value. They also miss out on the fact that ESOP is a highly technical concept. 

There are two more points I would like to make. ESOP isn’t a weekly engagement activity that companies can do as they please! The concept goes beyond simply fostering employee engagement. Second, a firm deciding to opt for ESOP simply needs to be aware of the profitability of the firm, industry, and market. Such technical aspects are imperative for an owner to understand. 

This ESOP story ain’t over yet! Let’s get deeper into this much-hyped term and explore its true value from the perspective of the market in the upcoming segment.