ESOPs - A Tool for Employee Retention

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Case Details:

Case Code : HROB028
Case Length : 11 Pages
Period : 1990 - 2001
Pub Date : 2003
Teaching Note :Not Available
Organization : Varied
Industry : Varied
Countries : India, USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

The Issue of Employee Retention

Employee retention is one of the important responsibilities of the HR department of any organization. The importance given to this activity is due to the fact that companies with a low employee turnover have traditionally been found to perform better than those with a high employee turnover. This was because high employee turnover results in the loss of customers and business, thereby affecting the financial performance of these organizations...

ESOPs

ESOPs can be defined as contribution of the employee pay package for investing in the stocks of the employer company. ESOPs enable the employees to buy shares of the company for which they work, at or below the market prices. They can gain from future increase in the stock price. ESOPs are generally used as part of incentive programs. By offering them ownership in the company employees could be motivated to perform more efficiently.

Though the basic concept of ESOPs had existed since the 1920s in the form of stock bonus plans, the term became extremely popular in the 1990s when the IT industry was experiencing a boom.

Human Resource and Organization Behavior | Case Study in Management, Operations, Strategies, Human Resource and Organization Behavior, Case Studies

Some of the reasons that contributed to its popularity were: firstly, many IT start-ups did not have enough cash to pay handsome salaries but had potential for future growth. Secondly, many such companies were performing exceptionally well on the stock markets with their share prices reaching dizzy heights. Such companies found it a very convenient way of running their businesses and retain their employees...

Corporates using ESOPs for Employee Retention

Though ESOPs gained popularity as a widely used retention strategy only in the 1990s, old-economy companies such as Walt Disney, Pepsi and Warner Bros had been using them since the 1980s.

Pepsi was one of the first companies to offer options to its employees across rank and file. The experiences of these companies showed that ESOPs could prove to be very beneficial. It was also supported by the researches conducted by leading consulting firms.

ESOP Problems & Future Prospects

Despite all the benefits offered by ESOPs, they had certain inherent disadvantages as well. ESOPs attracted much criticism from analysts who questioned its role in improving the performance of executives. According to a study conducted by Stanford Graduate School of Business, ESOPs were seen by many as a very poor incentive strategy for motivating employees. As per the study, it was found that sales commissions or the subjective evaluation by manager could motivate employees to work harder as they directly linked performance to salary. Some other disadvantages associated with ESOPs were mentioned in Table V...

Exhibits

Exhibit I: The Indian ESOP Story