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1. In today’s uncertain economic climate, what role do ESOPs play in maintaining or boosting employee morale?
Temporary economic volatility are a part and parcel of a capitalist economy. ESOPs, however, will always continue to play a very significant role in a growing economy. It also depends on how ESOPs are communicated to the recipients. Unfortunately, a lot is lost in translation. Employees may not always understand the long-term nature of this instrument; hence a strong and effective communication strategy needs to be developed for this. It is not about understanding the meaning of technical terms but understanding why the company has taken such a step and the philosophy and the message behind such an exercise.

2. Is there a ‘right’ time for a company to issue an ESOP plan? How early or late in a company’s history does an ESOP package make sense?
If you are reasonably certain about your growth story and a possibility of some external exit (IPO, strategic sale, divestment of equity, etc.), it is ESOP time. The earlier, the better. Because with each passing day, you create value. The more you delay it, the more equity you will need to give out to your people.

3. Usually ESOP plans have a relatively long vesting period. How do companies balance the need to keep their employees motivated enough to wait for their rewards? How do they make sure that employees don’t simply walk away, thinking that the vesting period is too long and not worth the wait?
Communicate, communicate, communicate! Companies need to spend time with their people explaining to them where the company is going, why the last quarter was good, or not so good, why do they still continue to believe in the growth story, why are they better than their competitors, what is happening on the profitability front, etc. This becomes all the more important in an unlisted entity because you don't have a quoted price on the stock market. Lack of communication can sometimes create uncertainty and confusion among employees. Once the people understand that the growth story is rock solid, they generally understand that the vesting period might be worth the wait. But yes, you can't stretch it too far.

4. What are some best practices in setting up ESOPs for the first time?
Your objectives for implementing the ESOP scheme should be clearly defined. Some companies might want to reward people for their past association - very common among young companies where a few founders and a strong core team started operations. People might have put faith in the company at a very early stage and left behind plum posts. These things are crucial and cannot be overlooked. At the end of the day, it is all about relationships. If your people feel good about your gesture, it can go a long way in boosting their morale. You may, however, not want to go overboard by covering too many people and later realising that the scheme has become unattractive. Adding people by the dozen is also not a good idea since the scheme might become difficult to sustain. Rolling it back would be politically incorrect. The one thing you do not want to compromise on is the attractiveness of the ESOP scheme - a more-for-few scheme is better than a few-for-more.

5. How necessary is it for a company to revisit its ESOP scheme?
It is absolutely needed. An ESOP Scheme is always crafted, based on a particular stage of growth. It has to be revisited every two years to check whether the same thought process applies to the current scenario. ESOPs are a wealth-sharing strategy and it has to be aligned to the existing business challenges. Many companies sadly make the mistake of determining a certain number of stock options per grade and keep it constant for years. In a lot of such instances, those numbers have lost relevance.

Tarun can be reached at tarun@justesops.com