Firms get flexible with stock options to retain employees
3 min read 18 Feb 2022, 11:23 PM ISTEmployers are offering early and more frequent encashment of ESOPs to attract, retain talent
PremiumRising attrition and the scramble for talent are prompting employers to allow early and more frequent encashment of stock options, as the promise of long-term wealth creation is failing to tempt employees any longer. The shorter vesting intervals, sometimes as brief as a month, allow companies to provide greater cash in hand for employees at regular intervals.
“In the technology sector—and primarily led by the Silicon Valley companies—we have seen a trend towards realigning the vesting of equity programmes to shorter durations. So, the typical structure would be as follows: The first 25% vests one year after grant and then every quarter, 1/16th of the total grant vests," said Anandorup Ghose, partner, Deloitte India.
“So, in effect, the employee has a constant flow of cash because most of these plans are also structured as restricted stock units (RSU) where the employee is paying almost nothing to get access to the share," said Ghose.
An RSU is typically a certain number of company shares allotted to an employee, and act as an incentive given after completing a specified tenure. Listed companies have mandatory vesting periods of about a year.
A Mumbai-based diversified conglomerate is in the process of changing the stock option vesting period for its leadership team. “Until now, the stocks were given after a period of three years, but now, we want to allow employees to encash them every year," said the HR head of the company who did not want to be named as the proposal has not been presented before the board yet.
The shift towards shorter vesting periods is across hierarchies, which gives one more ownership of the company. Headhunters have seen demand for profiles with reduced vesting period.
“In legacy firms, only the top management were given employee stock option plans (ESOPs) where a certain percentage is split over 4-5 years. Now, following the pandemic, as companies want to attract talent, especially OTT content players and startups, they are reducing the vesting period and some have come to search firms with a monthly vesting period of their ESOPs," said Navnit Singh, chairman and regional managing director for Korn Ferry, India.
Some like energy firm Vedanta Group have brought in new parameters in their stock options to align with their businesses.
“ESOP still remains a USP in our total rewards philosophy, but it has evolved over the last 18 years and in the current construct, it is more focused towards business performance parameters coupled with sustained individual performance which also acts as a multiplier to create appropriate talent differentiation," said Praveen Purohit, deputy chief human resources officer for Vedanta Group.
“With the focus rapidly shifting towards creating a sustainable organization, the elements of ESG and carbon foot print have recently been introduced as part of the scheme parameters," he added.
For specialist staffing firm Xpheno that largely focuses on IT firms, about 30% of their clients are reducing the stock option vesting periods. Kamal Karanth, co-founder of Xpheno, recounted the incident of a candidate who quit her senior role in an FMCG firm to join an OTT platform and within months move to an e-commerce company because they offered her ESOPs that could be encashed every quarter.
Education startup Teachmint introduced a Continuous ESOP Liquidity Plan in November 2021, where eligible employees get to liquidate their vested stock options at any time over the next year and chalk out their own financial plans.
“In the frenzy for talent in the startup sector, a flexible ESOP liquidity plan gives the employee control over their financial planning, which in turn impacts performance and helps in retention," said Mihir Gupta, chief executive officer and co-founder, Teachmint.
On Wednesday, B2B e-commerce platform Udaan removed the one-year vesting period and said all future ESOPs allocations will vest every quarter.
