An Employee Stock Option Plan (ESOP) allows an employee the right to purchase shares in a company at a specific pre-determined price on or after specific dates under the plan. It is a critical part of an organisation’s compensation strategy and is an employment benefit that allows employees to own a part of the organisation they work for. It helps foster a greater sense of belonging and loyalty and aligns the company’s and employees’ interests.
It is highly encouraged for business owners and start-up founders to implement ESOP. This is because ESOP is a powerful tool that encourages growth, strengthens overall company performance, and enhances employee morale, retention, and motivation by linking compensation with long-term performance horizons.
Read on to learn the 3 reasons why your company should adopt ESOP.
1. ESOP builds strong company culture
ESOP helps to align the company’s incentives and objectives with the employees. It creates an environment where employees and founders work together to achieve positive growth for the company. With the company founders and employees owning a share of the company, both parties will work very closely to achieve a common goal. In turn, this helps in growing and scaling the business. Employees will also be more open to working across different departments to support their colleagues and produce excellent collaborative work.
2. ESOP motivates employees to exceed expectations
When a company adopts ESOP, the employees’ compensation packages are not only limited to their monthly salaries but are also linked to the company’s growth and future.
ESOP fosters a sense of ownership within employees, motivating them always to give their best to the organisation. Employees can enjoy significant financial returns from increases in their company’s stock value as well as the value of the ESOP when the company does well. As a result, employees would be more motivated to do well and exceed expectations for the company’s best interest.
3. Higher chance of retaining employees
A strong ESOP usually has a vesting period. A vesting period is between the date the shares are issued and the date the employee can exercise all the rights attached to them. Employees will not receive their benefits until after the vesting period has expired. The standard vesting period is typically 3 – 4 years with a 1-year cliff. The cliff period is how long an employee must stay in the company before they can begin to accumulate share options.
ESOPs help companies retain talent, minimise employee turnover, and ensure high levels of organisational commitment. If an employee were to leave within a year, they forfeit all their share options as they left before the cliff date. Therefore, most employees on an ESOP would feel motivated to stay in the company until their ESOP has been vested.
ESOP benefits both the employees and the company. If executed properly, ESOP can help to build strong company culture, motivate employees, and attract and retain talents. If your company plans to adopt the Employee Shares Option Plan in Singapore, get in touch with a certified valuation analyst for a valuation of your business and to help your business estimate share-based expenses using option pricing valuation models.
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*The above represents our opinions and views and does not reflect the position of any entities mentioned.