November 27, 2023by Ms. Mohini Varshenya0

Employee Stock options have emerged as a significant element in shaping employee compensation packages. ESOP provide employees the opportunity to participate in the company’s success and align their interests with the Organisation goals. Thus, it’s crucial to explore how Employee Stock Options (ESOPs) has replaced the traditional compensation structures.

ESOPs and other equity-based instruments constitute the variable aspect of employees’ compensation packages. Conversely, traditional compensation methods like Basic Salary, Dearness Allowance, Medical and Conveyance Allowances lack a direct correlation between employee performance and organizational success. Gratuity in traditional methods offers retention benefits, while Provident Funds cater to wealth creation and retirement benefits. Nonetheless, performance-linked traditional methods such as Performance-linked Bonus, Promotion-Linked Compensation, Performance Appraisal Systems, and Non-monetary rewards often fall short in ensuring long-term employee retention. Hence, ESOPs represent a blend of retention, motivation, and performance-linked rewards.

This brings about various changes and benefits in Compensation structure of an Employee under ESOP when compared to traditional modes.

  • Long-Term Commitment: Employees are motivated to remain with the organization for extended periods.
  • Ownership Feeling: Employees experience a sense of ownership as they hold a specific number of shares allocated to them, which creates a stronger connection to the company’s growth and success.
  • Performance Rewards: ESOPs serve as a rewarding tool tied to employee performance. This linkage encourages employees to enhance their performance to meet the criteria associated with these Options.
  • Wealth Generation: ESOPs offer employees the opportunity to create wealth over a period. As the company grows and its stock value increases, employees benefit from financial growth, thus strengthening their financial security.

While ESOPs deliver a range of advantages, they also come with certain costs for companies. ESOPs cannot be distributed randomly to employees; eligibility criteria are established to determine which employees qualify for these stock Option. Consequently, describing Employee Stock option plan merely as a compensation tool is incomplete, as ESOPs is a combination of other benefits beyond traditional compensation.

In essence, ESOPs and other equity-based instruments replace traditional compensation structures by way of employee motivation and engagement while also creating a sense of belonginess among of employees.

Ms. Mohini Varshenya

Ms. Mohini Varshenya

Partner & Head-ESOP Services

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