Morale for Esops fables: Be employee-friendly

After a hiatus, employee stock option plans or Esops have suddenly become the flavour of the season. While Esops first attracted the attention of the country after Infosys launched them in the first decade of this century making millionaires out of ordinary employees, tech start-ups have started offering them in growing numbers now. Among the companies that are offering Esops to employees are PhonePe, Licious, ShareChat, Wakefit and manufacturing majors JSW Steel and JSW Energy. Ola also wants to expand its scheme and Infosys has said that it would revive the exercise to retain talent when it has become an important differentiator in the post pandemic world.

While Esops are an appropriate tool for compensating and retaining talent, the choice of the employees who would be given Esops should rest only with the management. However, the designing of Esops should keep the interest of employees in focus. First, no employee should pay for the shares given to it under this scheme. Usually, Esops have been offered mainly as a reward for performance for middle and senior-bracket performers. Therefore, there is no question of employees paying anything for what comes as a reward.

Second, even if Esops are offered vertically across the board, as some companies are doing, the management should ensure that there is no pay out by the employees. Some banks and non-banking finance companies offer loans to buy shares under Esops, but that would only burden employees with a hefty interest just like a loan on any other account. If necessary, the company should offer interest free advance to employees to buy shares.

If the Esop is implemented through a trust, they should be funded by the company to acquire the shares that are to be allotted to the employees. Under no circumstances should an employee pay to buy the shares since it is basically a part of their remuneration or a reward for performance.

When an employee sells the shares, he/she is liable to pay capital gains tax, which is computed on the difference between the price at which they sale is made and the price at which the allotment was made. The company should clearly inform an  employee about this future tax liability before he/she signs up for the scheme.

In 2020, the Centre relaxed rules on Esops that required employees to pay tax at the time of allotment of shares. If a debt-stressed government can rework tax rules against its interest, it is all the more incumbent on the companies to design the schemes in the favour of the employees.

Esops are a part of an employee remuneration package meant for employee benefit and should be designed so. How Esops are structured would, in the long run, separate the men from the boys in the talent market.