Rizwan Khan is currently the Vice President of Human Resources & Administration at Porter. He is a results-oriented Human Resources professional passionate about people and organizational transformation with a good blend of strategic and operational skills. Rizwan is responsible for driving the talent management strategies for the company.
Introduction to the changing times
The years 2020 to 2021 saw a slew of unicorns in India that created a tremendous buzz, not only through their funds raised and innovations that impacted society but with the allocation of ESOPs for their employees. An ESOP or employee stock option program has caught the attention of companies and employees as it gives the latter the power of ownership. With the Union Budget laying prominence over ESOPS and the various regulations surrounding the program, it has grown to become an important part of companies with its ability to retain talent despite taxes and legalities surrounding it.
With the entrepreneurial wave in the country, the allocation of ESOPs by these firms has made headlines even during the pandemic where it has resulted in record growth for both company and employee.
The rise of startups and changing employee behaviour
In 2021-22, India saw an emergence of 14000 newly recognized startups with 83 of them labelled as unicorns. With the influx of fiercely competitive entrepreneurs and budding ideas to churn the economy, employment opportunities are on the upswing. Such an increase in numbers and employees shouldering the responsibility of working towards the productivity of young companies comes to show a high degree of enthusiasm. However, employees in this sector will continue to show an urge to grow only if companies can provide solutions where learning and development opportunities are shared from time to time.
Workplace culture has shifted from traditional methods to a more flexible one where businesses and employees are equally important in everyday conversations, problem-solving, and company decisions. The year 2022 will see employees as the foundation of any business as they will be required to share their opinions and ideas as part of the company’s growth. Human capital is a permanent resource where organizations are focused on employee retention by addressing their needs whether in terms of providing financial security and others such as mental health, sense of ownership, reducing alienation from the company decision, etc.
In order to motivate employees and bring in a sense of pride in their association with the organization, it becomes paramount that companies think of ways that result in creating a win-win situation for employers and employees.
Looking after our human capital
Despite the world fighting a pandemic, recessions, or any economic damage that unforeseen circumstances might bring, there has been an open war for talent. Even though the term ‘war for talent’ was coined by Steven Hankin of Mckinsey in 1997, it holds true to this day. The pandemic did no favors to the phenomena and maintaining top talent reached an all-time peak. The Great Resignation brought with it a demand to maintain work-life balance and mental health issues that ought to be addressed by companies across the world.
While talent today is looking at a more accessible route to reaching out to top management and being an important part of company changes, businesses are forced to comply with the evolving trends. With society slowly inching towards being fully vaccinated, the drive to recruit talent and work towards a more positive workplace has been the number one goal of recruiters in the recent past. Employees who were previously given the pink slip due to the effects of COVID-19 are now being offered positions at the same firm.
Companies now would have to stop looking at ways to meet employee needs only through higher paychecks but look at a more holistic approach of creating a family-like environment. Benefits such as leave policies, addressing gender issues, wellness programs, and opportunities to climb the corporate ladder are part and parcel of today’s expectations. It is here that ESOPs also play a critical role in keeping the best interest of the employee at heart.
Introduction of ESOPs
With the passage of time and experience, the definition of working with companies has changed and businesses are mandated to make employees feel safe and equally in line with the former’s goals. A tool that allows a situation such as this to prosper is an Employee Stock Option Plan (ESOP). An ESOP program is a benefit plan which offers employees a way to acquire shares of the company. An ESOP is granted by the management basis factors such as seniority of the employees, past associations, efficiency, importance within the setup, etc.
In the beginning, the primary objective of an ESOP was to retain employees and attract potential ones into the organization. It has now turned into a tool that motivates employees and creates a security blanket post-retirement.
These ESOPs are accompanied by a vesting period which allows employees to gain ownership of these stocks over this defined period. Post the completion of the vesting period, employees can exercise their options and convert them into shares by paying a price as decided in the ESOP policy. In the case of Porter, this strike price has been kept at a nominal Rs. 10/option. Some organizations also have a fair market value defined which is actually the difference between the grant value of each share and exercise value, which is defined as per the valuation of the company at the time of exercise. However, the real monetary gain happens when there is a liquidation event. ESOPs have radically changed how companies view their employees and how employees view their respective organizations. As stakeholders, employees now feel a sense of ownership towards the organization while making them think like a leader.
Wealth creation pool v/s value creation pool
Fundamentally, ESOPs were primarily created for wealth creation. However, one must ponder over the fact that if wealth creation was the only thing on the minds of employers, then a simple equity model would also be an alternative solution. If the company would allocate equity pools divided between their employees, founder, co-founders, etc.
On the other hand, ESOPs have evolved into a tool that is now based on value creation. This means that it helps employees with better engagement in companies and boosts their motivation to perform better. When motivated employees generate more value for the organization, ESOPS generate wealth for the employee and act as a reward for their effort. Since the core of every startup is a committed relationship with the employees, ESOPs can add to creating value by allowing equal responsibility on both. At Porter, the idea behind the ESOP takes shape from the basic premise of propelling an employee forward and breaking free from a traditional employee-owner environment. By doing so, the company ensures that the employees experience a sense of autonomy resulting in higher employee engagement and better results.
It is important to understand that ESOPs are not a miracle formula where ownership and autonomy can be cultivated overnight. However, it will aid in creating a holistic environment that companies are now moving towards. It has now been realized that by adopting ESOP programs as one of the initiatives and allowing employees a stake in the organization, there are recorded improvements in productivity and performance.
In simple terms, every individual, whether employer or employee, wants a positive and financially secure environment to work in. ESOPs can be the tool to balance just that.
Creating an ESOP awareness
In India, it is recorded by the Ministry of Commerce and Industry that startups have generated 5.98 lakh jobs. By housing thousands of startup companies, the growth of these firms and the capital inflow have given rise to ESOPs. Conversations on ESOPs, therefore, become essential, and employees must be aware of the benefits and governmental regulations that surround the option to make decisions wisely. ESOPs are a tool that can encourage conversation from employees in terms of sharing new ideas, techniques to improve profitability etc. However, it is paramount to educate employees on what ESOPs are and how their association with the company can lead to a more holistic environment.
Organizations in India, especially young startups during their growth phase comprise of a highly motivated, young, vibrant, and energetic workforce. However, for the workforce to remain motivated and contribute to the collective goals of the organization, and leadership, a concentrated effort towards value creation is essential. ESOPs, therefore, fill this chasm by bridging the gap between wealth creation for the company and wealth creation for the individual. With the startup ecosystem touted to be a large contributor to India’s GDP, programs such as this will help motivate the workforce to the larger goal of country building.