Design an Esop Scheme
An ESOP strategy needs to be a part of the overall corporate strategy. It is a means to the final end – growth in organizational value and hence needs to be crafted in a manner that best fits the current business strategy and challenges. This is the reason why not only companies in two different industries but even two companies in the same industry may need completely different ESOP Schemes – they may be at different stages of growth (e.g. a start up vs an established company), may be facing different challenges (only domestic vs multinational operations), may have a completely different people profile (so called old economy or PSUs vs new economy businesses), and so on. If the ESOP Scheme is not customized keeping these parameters in mind and instead a simplistic cut-and-paste model is applied, it may not quite be the right stimulant.
We follow the following approach while designing an ESOP Scheme:
i. The roots
What is my basic objective behind wanting to implement an ESOP Scheme? What is the real message I want my people to get? Should they consider this as a guaranteed reward irrespective of their future performance or the company performance? Should they appreciate that being a part owner also means you sink or swim together? Is this a part of their existing compensation or is it the cream on the cake? What if the IPO does not happen as planned? What if the stock price falls tomorrow? Should there be a different scheme for a CEO / core team? Do I want the scheme to also reward people for their efforts in the past or should it only provide an attractive incentive to create value in future? Or both? How much equity should I give out to my people? Is there some magic in that 5% equity number everyone seems to be fascinated about?
The list goes on. If we don’t discuss all these questions, and many more, threadbare, chances are that an ESOP scheme may not achieve its desired objective. Defining the underlying philosophy of the scheme is extremely crucial as it acts as our guiding light, while we move in the desired direction. And along the way if our thoughts get a little muddled, we pause for a moment and go back to the underlying philosophy – the basic objective – we had defined for the scheme and clarity resurfaces.
ii. The trunk
An ESOP Scheme is essentially a collection of certain variables – which instrument, when, who, how much, what price, what period, what terms, how frequently, etc. The next step is to build a framework, a policy, around these parameters keeping the rules as defined above in mind.
iii. The branches
Once a policy emerges, it has to be well documented. There are legal, accounting and tax implications that need to be studied. Certain statutory requirements need to be fulfilled as per the prevailing laws.
iv. The leaves, fruits and flowers
Any scheme however well-sculpted, well-thought-through, well-documented fails if it is not communicated to the people in the right manner. A step that is crucial, and often ignored. If your people aren’t able to understand your intention behind implementing the scheme, if they can’t connect with you, your vision, your dreams, we can assure you they will forget all about it the moment they leave office that day. So communicate, communicate and communicate! And in a human, real, genuine way and not by just sending a formal email to tick-off the to-do list! Emotions have to be transmitted in person. Till that’s done – no leaves, flowers or fruits.
And this is what we do best!
We hand-hold you throughout all the phases mentioned above. We make you think through each step thoroughly – repetitively if required – to ensure that you choose a certain path, only when you are convinced about that path as also convinced about not walking down the other paths and the reasons for doing so. We play the devil’s advocate to ensure that the scheme is a win-win from the company’s, investors’ and the people’s perspective.