“How the Annual Appraisal cycle and ESOP Grant can go hand in hand.”

Annual Appraisal and giving of enhanced CTC and Rewards is an important activity in an organisation once the new financial year begins and also to set up a new parameter for the new financial year. Appraisal systems are designed to enhance organizational efficiency, evaluate employee performance based on specified criteria like targets, performance pro, and areas for improvement. These criteria may vary as per organizational structure and size, impacting the frequency of appraisal cycles which generally in most of the organization is an annual process.

Appraisal process aims to motivate the employees and inform them about rewards earned on the basis of their performance & increased CTC for the new financial year, setting of new parameters for the new Financial year.

ESOP’s provide employees with the opportunity to participate in the company’s success and align their interests with the Organisation goals and give the employees an ownership interest by participating in the Stock /Shares of the Company. It is an integral compensation tool for retaining and employing human resources.

The objective of ESOP includes motivation, retention, and wealth creation, and reward for both past and future performances.

If the organization aligns both these modes for designing the pay structure for introduction of ESOP’s, a synergy can be created that will not only compensate the employee over and above their compensation but will also motivate them by performing better. Thus, it will not be wrong to say that annual appraisal cycle and ESOP Grant can go hand in hand in an organisation.

How these two are aligned:

  1. Rewarding the Performance through ESOP’s: The performance of an employee can be assessed on the basis of annual appraisal cycle, and then be rewarded on the basis of the targets achieved by an employee in the form of ESOP’s. This serves the purposes of retention and motivation for the employee to perform better.
  2. Promotes a Culture of Performance and Reward in the organisation: By aligning ESOP with appraisal cycle, will create a culture of the organisation, where the efforts and performance of the employees are rewarded with ownership. This approach can offer companies a competitive advantage in the industry.
  3. Employee engagement: Rewarding ESOPs based on the appraisal process serves as a motivating factor for employees, and investing in the organisation where they dedicate their efforts, which will ultimately boost the engagement of the employee at the organisation.
  4. ESOP’s serves the best tool for providing the long-term incentive: ESOPs provide a sense of ownership among the employees, thus aligning the interest of the employee with the long-term interest of the organisation will encourage the employee to stay for a longer period of time with the organisation.
  5. Deferred Rewards: ESOPs are often considered as deferred rewards because they grant employees the right to obtain company shares at a future date, typically after a vesting period or upon meeting certain conditions. Employees receive these shares as part of their compensation package but may not have immediate access to them.

Thus, successful implementation requires a proper structuring of targets, goals, type of compensation which aligned with the objectives of each organisation respectively. This approach motivates employees, enhances engagement, and fosters a culture of ownership among employees. Companies adopting this integrated strategy can drive growth and success while nurturing a highly engaged and motivated workforce.

Ms. Mohini Varshenya

Ms. Mohini Varshenya

Partner & Head-ESOP Services

FCS

mohini@indiacp.com

+91 9971673332

One comment

  • Avatar
    Umesh Sandu

    January 18, 2024 at 6:55 am

    Good and informative article.Gives good insight into the whole process of ESOPS and also retaining good talent.Nice and good to implement.

    Reply

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