There are plenty of success stories of employees making a fortune along with the founders of their startup companies. When Google became a listed company, co-founders Larry Page and Sergey Brin saw the value of their shares skyrocket and joined the ranks of the richest people in the world. What also happened was approximately 900 of other Google employees became millionaires in 2004.
How did this exactly happen? Much of this was through the distribution of employee stock options. For those who are unfamiliar with the term, employee stock options is a form of compensation that offers a company’s stock to certain employees. Typically they are used as long-term incentives and granted to those in management or officer-level positions, but can be widely given out to employees of an early stage business.
What are Employee Stock Options?
In a nutshell, employee stock options give the right to buy a certain amount of stock during a specific period of time at a specific price. Options typically have additional rules like expiration dates by which the options must have been exercised, otherwise they will be cancelled or become worthless.
Entrepreneurs like Lavine Hemlani of Asia-based education-to-employment platform Xccelerate, have been increasingly employing stock options as part of their compensation toolkit. “Employee Stock Options is part of the total rewards package but on top of that it is a real and a symbolic way to build a sense of ownership and personal investment. Implementing ESOPs at our company has increased average employee engagement and retention”.
Stock options are a powerful compensation tool as it promises potential cash or stock in addition to pay. It represents the most common form of employee incentivisation because when a business is mutually-beneficial, things naturally work out!
The company will work with lawyers to draft out a legal document set that will include the Employee Stock Option Plan (ESOP) that delineates the terms and conditions of the options. This plan will spell out rules, outline key terms such as size of pool, vesting date, exercise rights, exercise date, expiration date and specified price at which employees can purchase shares.
An ESOP is not offered by every company but for those who have the opportunity, it is a stroke of good fortune and good business. Even though the employee does not reap the benefits of stock options in the form of immediate cash, stock options hold potential to pay off big, especially if you join the company early on and it takes off. They are also an attractive and straightforward investment opportunity, working as a way for employees to invest their careers.
“Implementing ESOPs at our company has increased average employee engagement and retention”.
Lavine Hemlani, CEO, Xccelerate
Employees will get preferred pricing, which means the price of their stock is reasonably higher than the pricing offered by the company. They are also able to diversify their investments, an opportune option to be able to buy stocks starting early in their respective careers.
Lastly, ESOPs are an easy way to save your money through payroll deductions facilitated by the company to help you stay on track with your long-term savings plan and goals.
In sum, efficiency pertaining to compensation begins with employees feeling satisfied and appreciated. ESOPs unlock and upturn their intrinsic motivation and passion about your company and propel it to a new level of success.
Employee Stock Option Plan or ESOP can play an effective part of your compensation strategy to engage employees in the long term and bestow ownership status to them. When you align long-term interests of stock options with short-term compensation, like cash, that’s when the magic happens.