Businesses roll out stock options to retain employees

Working environments struggled due to the pandemic with accelerated work-from-home protocols being enforced even in legacy organisations. But with rising disillusionment in the workforce, companies are resorting to innovative stock options to boost retention. But is it enough?

From Resignation to Renegotiation

The Covid-19 pandemic has brought about wholesale changes to attitudes towards the workplace, and mental health. There’s been a sharp increase in employees quitting the workforce, whether it’s exhausted frontline workers or C-level executives looking to spend more time with their families. Labelled ‘The Great Resignation’, it has given rise to an increase in demand for talent, and forced organisations to rethink their retention strategies.

From offering hybrid working models that allows employees spend time with their families at home, to stock options for a financial incentive, we have entered a phase of the Great Renegotiation. Employees find themselves at the enviable position of negotiating for a better and more convenient working model, and a more lucrative financial package including partial ownership of the company with stock options, stock appreciation rights, and more.

Also read: Why Are Indians Eager To Quit Their Jobs?

Understanding Stock Options

Employee Stock Option Plans (ESOPs) have been around for some time, but they’ve mostly been reserved for top executives, and have been designed to significantly prolong their stay. ESOPs give employees the right to purchase shares of the company, usually at a discounted rate, which can be encashed after a defined amount of time, or vesting period. Previously, the vesting period would be a minimum of one year, but today companies offer monthly and quarterly vesting periods, giving employees more cash at regular and shorter intervals.

Enter Phantom stock options. Phantom stock options are a performance-based incentive that provides the monetary equivalent of the value of a defined number of shares, upon reaching a performance milestone. Phantom stock options can be of two types – full value, and appreciation only. The full value phantom stock entitles the employee to the entire value of the predefined units during encashment of stock options. Whereas, the appreciation-only model, entitles the employee to the rise in the worth of the pre-defined units of stock from the time it was granted, to the time it is encashed.

Restricted Stock Units (RSUs) are a stock-based compensation that promises future conversion to stock units, after the vesting period which can be based on performance, or length of time. The difference between RSUs and phantom stocks being, that the former converts to actual shares, whereas the latter provides a direct cash bonus without diluting the share capital.

Also read: All You Need To Know About ESOPs

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These strategies are being increasingly employed by organisations not just to attract, but also retain talent. A study by the Work Institute states that a business spends up to 213% of an annual salary to replace executive positions within the company – making retention a priority. A 2017 study estimates that companies double their return on investment through an employee share plan on just retention benefits alone. Psychologically, employees are more likely to buy into the culture and goals of the organisation when they have a financial interest in it.

So, do employees stay longer with stock options?

Historically, yes.

But there is one caveat. Employees are also more likely to quit after encashing their share options. And with reduced vesting periods, showering employees with financial incentives alone may not work in enhancing retention. This is where employee engagement would be key in retaining top talent.

This includes ramping up engagement close to vesting dates, with both personal and group activities, re-evaluation of career goals, showcasing the company’s future financial prospects, and giving employees visibility of their equity in real-time.

The verdict

It’s evident that employee stock options are not the only solution to retaining important team members. Furthermore, employees need the flexibility of frequent encashment with vesting periods of shorter durations, and more engagement with the company. Finally, as seen with extraordinary circumstances such as the pandemic, a healthy work-life balance is key to employee satisfaction, and retention.

Also read: These 7 Perks Can Give You Better Job Satisfaction And Work-Life Balance