Employee Stock Ownership Plans, or ESOPs, are part of the employee benefits provided by the employer. These are part of the compensation package and allow the employees to acquire and sell some shares of the company stock at a later date. Employees may also receive dividends from the owned stocks during their time with the organisation.
Google and Facebook diligently provide ESOPs to retain talents, but the challenges cannot be overlooked for smaller organisations and start-ups.
This article provides insights into the common ESOP problems.
Despite employers providing ESOPs to retain talents, it can often have a downside. The following ESOP problems are discussed from the point of view of the employer.
ESOPs can impact the cost of equity capital of a company as they often issue new stocks for ESOP, increasing the number of outstanding shares.
As a result, it dilutes the existing shareholders' ownership stake and impacts the company's overall market capitalisation.
Simultaneously, raising new debts can also become challenging since the company already has some obligations by providing ESOPs to its employees. These ESOP problems can negate the tax benefits companies can gain from it.
Employees also suffer from uncertainty when providing ESOPs to their employees. If the employee leaves the company, the company has to buy it from them as a lump sum or in instalments. However, this transaction must happen at the market price then.
Therefore, the price of shares of the company during that time and its financial condition can impact the overall cash flow. Hence, it can be said that opportunity cost is one of the major ESOP problems for employers.
Like employers, ESOPs may not always be the best solution for the employees either. Although many high-growth companies can expect to motivate their workforce through ESOPs, it has disadvantages.
Employees compensated via ESOPs, tend to have a large portion of their retirement savings locked in the company. Things can quickly go south if the company does not do well. If the company files for bankruptcy, employees can even lose their jobs without having any retirement funding to bank on.
ESOPs are a great perk, but they only pay off if employees stick around long enough to see the company grow. If someone leaves before their shares vest, they might miss some benefits. Non-qualified stock options can be cashed in immediately, but incentive stock options may have a waiting period. And if an employee leaves before their shares vest, they'll lose out on the unvested portion.
Employee Stock Ownership Plans are not flawless despite their benefits for the employees and employers. Therefore, understanding the problems with ESOPs will provide a better opportunity to make a more informed decision.
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ESOPs can be risky for an employee as it does not guarantee any positive return on the investment on behalf of the employee. The employee's retirement account is tied to the future value and performance of the company, which creates a lot of uncertainty. However, ESOP can be a good option in organisations where employees are valued and not easily replaced.
ESOPs have both positive and negative impacts on a company. While the ease of transfer makes it an excellent retirement solution that companies provide to their employees, there are some ESOP problems too. The complexity, uncertainty, and zero impact on productivity make ESOPs tricky solutions for companies.
