What is an Employee Stock Ownership Plans (ESOPs)?

Implementing ESOPs in a Company to Maximize Talent Potential

Being an entrepreneur who manages both the organization and its people is not an easy task, especially in this modern era where employees seek stability and good benefits in their careers. Many companies that fail to meet these expectations often encounter difficulties retaining their employees, sometimes leading to the loss of valuable talent to other organizations.

In this article, we're going to introduce a new technique that startup businesses in Thailand are starting to adopt: the "ESOP: Employee Stock Ownership Plan." This formula provides additional benefits beyond salaries, helping to attract and retain talented employees!

What is ESOP ?

The Employee Stock Ownership Plan, or ESOP, is a strategy that companies use to allocate shares or the right to purchase shares to employees. Employees receive stock options when they meet certain conditions set by the company, such as completing a specified period of employment or helping the company achieve its goals. ESOP shares are one of the benefits that can motivate employees to become more engaged in their work. Furthermore, ESOPs can also help retain employees longer, as they provide employees with a sense of ownership in the organization.

What Are the Types of ESOPs?

1. Restricted Stock Grants

Restricted Stock Grants are a type of ESOP where stocks are directly allocated to employees with conditions or restrictions. Employees who receive these stocks must work for a specified period as determined by the company before they can sell, transfer, or change ownership of the stocks. If an employee leaves before the specified period, they may be required to return the stocks.

2. Stock Appreciation Rights (SARs)

SARs, or Stock Appreciation Rights, grant employees the right to receive compensation equal to the "difference between the future stock price and the stock price on the SARs grant date." Employees will receive compensation in the form of cash or company stock, based on the difference in stock prices.

SARs do not grant ownership of actual stock but rather pay compensation based on the performance of the stock price. The advantage is that it helps mitigate employee risk because they don't have to invest in purchasing actual stock, yet they still benefit from the increased value of the stock. However, the downside is that SARs are complex and subject to market risks. Nevertheless, SARs remain an

3. Phantom Stock

Similar to SARs, employees do not actually hold stock with Phantom Stock. However, the difference lies in the mechanism for calculating compensation. Phantom Stock involves paying employees in cash equivalent to the "stock performance over a certain period," which is determined by the specified number of shares multiplied by the change in stock price. The timeframe for receiving this compensation typically depends on employment conditions and tenure.

In summary, SARs and Phantom Stock are methods of providing compensation to employees based on stock performance. SARs pay based on the difference in stock prices, while Phantom Stock pays based on the value of the hypothetical units of stock allocated.

4. Employee Stock Purchase Plans

This type of ESOP offers employees the opportunity to purchase company stocks at a discounted price lower than the market value, such as a 15-20% discount from the actual stock price. However, there's a condition that employees must contribute to a savings plan from their salary for a certain period before being eligible to purchase stocks. This motivates employees to participate in company ownership at a lower price and allows them to sell the stocks later for profit. 

What Are the Advantages of ESOPs​​?

• Attracting and retaining talented employees: ESOPs are a tool that helps attract skilled individuals who are interested in working for the company. Additionally, they assist in retaining employees with potential, encouraging them to stay with the company for a longer period.
• Creating motivation in the workplace: When employees have a stake in ownership within the company, they are more motivated to work diligently and driven to develop the organization further because they directly benefit from its success.
• Fostering employee loyalty to the organization: ESOPs help employees feel like they are a part of the organization, fostering loyalty and commitment to the company.
• Increasing employee morale: When employees have the opportunity to receive rewards from the company's growth, their morale and motivation to work will increase significantly.

Which Businesses Are Suitable for ESOPs?

ESOP is suitable for various types of businesses that aim to motivate and retain talented employees. The main types of businesses in Thailand that are starting to implement ESOP include:

Startup Businesses

Generally, startups have limited financial resources. Therefore, they utilize ESOP as a motivation tool to attract and retain skilled employees by providing them with the opportunity to own a part of the business. When the organization succeeds, employees receive higher rewards in return.

Technology and Innovation Businesses

This industry is often highly competitive. So, using ESOP to attract and retain skilled and knowledgeable personnel is a good incentive, especially for roles such as Software Engineers, Data Scientists, AI Specialists, and more.

Professional Services and Conglomerates

Companies such as law firms, consulting firms, financial institutions, and government agencies often need to retain highly knowledgeable personnel. Offering ESOPs helps employees feel more involved and committed to the organization.

Businesses with Capital Raising Plans or Stock Market Offerings

ESOPs stimulate employees' motivation to create value for the organization because they are aware that they will benefit from the growth of the stock value.

Choosing ESOP Stock Types

Restricted Stock Grants

• Suitable for operational level employees with outstanding performance.
• Instills a sense of ownership in the business, enhancing motivation to work to the fullest.
• The company needs to allocate capital to issue new shares or buy back shares from the market.

Stock Appreciation Rights (SARs)

• Suitable for employees at all levels within the organization.
• Provides an opportunity for high benefits if stock prices increase, serving as long-term motivation.
• A good option for companies with limitations on issuing new shares and don't want to allocate a significant amount of capital to grant employee rights.

Phantom Stock

• Suitable for employees at all levels where the company aims for long-term motivation.
• Has no impact on capital structure and the company's shareholding proportion.
• A compensation format simpler to understand than SARs, suitable for small-sized companies.

Employee Stock Purchase Plans (ESPP)

• For general operational level employees, ESPP should be designed to be simple, such as short purchase periods of 6 months to 1 year and modest discount rates.
• For management-level employees and key personnel, ESPP should have longer periods of 1-2 years and higher discount rates to serve as motivation to continue working with the company.
• If the company has limited capital, it may set quotas for ESPP stock purchases per person or may reduce the discount rate.

While ESOPs can be implemented across various businesses, it is essential to consider their suitability based on the organization's characteristics, culture, and long-term objectives. Additionally, companies utilizing the ESOP model should carefully design comprehensive plans, considering factors such as conditions, duration, and appropriate stock allocations to maximize benefits for both the company and employees.

Want to become a leading organization that fosters happiness in the workplace? It all starts with small-scale management within! We recommend you get acquainted with "HappyWork," a human resources management system for HR and modern organizations developed by Jenosize with the best technology. Try it out for free today!