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Esop fables: the motivation tool has its downsides, too

With several sectorsv facing severe talent starvation, retention of existing employees and attracting prospective ones have become a big challenge for companies.

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MUMBAI: With several sectors, especially the knowledge-centric ones, facing severe talent starvation, retention of existing employees and attracting prospective ones have become a big challenge for companies. And, compensation is one of the key elements through which talent is attracted, retained and groomed.

The All India Management Association held a two-day national level summit on compensation and benefits management, where many industry professionals as well as consultants presented papers on a wide variety of compensation topics like designing variable pay, developing compensation system and process and ESOPs.

ESOPs, or employee stock option plans, have become very popular with companies wishing to attract and retain employees.

A stock option is an option to buy the shares of your company in the future at a pre-determined price. The choice of exercising the option rests with you, and hence, if the price falls below the offer price, you don’t have to exercise your option.
Employers have found that it is a great motivation tool, which gives a sense of ownership to the employees.

While the concept was popularised in the early days by tech companies, later, even manufacturing and service sector companies, joined the bandwagon and began offering stock options.

“We find that many times communication becomes a key issue in stock options plans, particularly in the case of non-listed companies. The options are loosely worded, and may even be verbal commitments,” he said.

If for the management stock pricing and legal issues are things to look out for — what if an employee sues the company for the losses suffered on account of lost stock options after hisher services were terminated — for employees, it is essential that they consider issues like transparency in grant, liquidity option, and downside risks before undertaking the options.

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