With talent being more sought after than ever before, companies are leaving no stone unturned to engage and retain their best people. One way to enhance employees’ engagement with the business is to offer them stock options. Employees welcome the option to earn from holding a small part of the company. Kulpreet Kaur, co-founder of Shoppirate.in explains how to make employee stock option plans (ESOPs) a success.

Launch the ESOP only after your revenue steadies
A volatile earning pattern makes for volatile stock value, which can demoralise employees in recession years. It’s best to implement an employee stock option plan only after your revenue steadies.

Define the beneficiaries
We offer stock options to all our employees—entry level to seniors. An ESOP is a strong motivator for entry-level employees. It serves as a valuable component of the compensation package of senior-level employees as it becomes challenging for start-ups to match their salary expectations. It also gives seniors a sense of ownership and engages them with the growth of the company.

Set aside shares for the ESOP
Start-ups usually set aside 5 to 20% shares for ESOPs. We have set aside 7% shares for ESOPs.

Define the ESOP clearly
Shoppirate offers employees stock options as part of their compensation package. We have made it clear how many shares employees can buy and at what price. As an example, an employee whose annual cost to company is Rs.10 lakhs including a 20% stock option can buy shares worth Rs.2 lakhs at face value. Employees aren’t permitted to vest stocks immediately; shares are locked-in for 3 to 4 years for different employees. We also make it clear to employees that they will incur a tax liability on the difference between the last known value of the stock and the cost price.

Introduce an enhanced communication policy
ESOPs are a great motivator if other aspects that enhance employees’ sense of ownership are also taken care of. More communication—in terms of the number of communiqués from the management and the depth of content shared—is vital to make employees feel they genuinely have a stake in the business. Our communication goal is to align company and individual goals for the best outcomes and individual performances.

Get legal advice
It’s easier for private companies like ours to launch ESOPs. Listed companies are mandated to follow more rules prior to launching ESOPs such as availing permission from SEBI and showing healthy financials for the three previous years.

Create a reserve for ESOP share buybacks
Shares issued under ESOPs are not transferrable. After the lock-in period expires, employees have the option of selling the shares to the company at face value. Also, departing employees must surrender their shares for face value. To ensure that these eventualities do not dent cash flows, set aside funds to buyback shares. We aim to create a reserve of 10% of the face value of shares issued under ESOPs.