Are Employee Stock Ownership Plans (ESOPs) Good for Tech Companies?

ESOPs – Employee stock ownership plans are offered by some employers to their employees as compensation, majorly in the form of rewards or incentives. This compensation is different from the salaries, reimbursement, or bonuses that the employer needs to pay as per the standard company rules in most regions. Most of the known tech companies around the world have started offering ESOPs to attract talented employees and drive employee retention. In turn, employees can gain huge monetary benefits from these stocks as the value of the stocks can grow significantly for a growing company. After a certain time, the value of stocks grows beyond the regular salary, thus incentivizing the employees to continue working for that company. So, the benefits of ESOPs serve dual-purposes and lets a company grow faster with their quality employees.

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How Do ESOPs Work?

There are various types of ESOPs that vary from company to company. But the main idea of ESOPs is to include the employees as a part of the company’s growth.  Most of the companies, as a part of their compensation plans, offer a certain number of shares to their employees. It can either be offered at an incredibly low cost or no cost at all. These shares are transferred to the employees after a particular interval of time (usually every year). The employees are eligible for these shares only if they agree to certain terms and conditions. The shares will keep on increasing with time as long as the employee is working with the company, and then at the time of retirement, the employees will receive money in return for the shares he or she holds.

What Are The Benefits of ESOPs?

ESOPs have benefits for both the employees and the employers. So, let us have a look at the top advantages.

  • If you are an employee, good ESOPs means having a lot of monetary benefits. If you are going to be or currently are a part of a fast-growing company, you can understand how the monetary value of your stocks keeps increasing. ESOPs have a long-term benefit which is necessary at the time of retirement or whenever you are leaving the company. But, at the same time, you should also check all the terms and conditions of the ESOPs before signing one. Huge tech companies like Google offer ESOPs, which can help an employee make more than their normal salary.
  • ESOPs are very flexible even when a company owner sells majority stock of the company. The ESOPs allow any company owner to sell from 1 percent to 100 percent stocks of the company for a new compensation plan. ESOP transaction processes also offer better confidentiality as compared to third-party sales. There is a general consensus that the probability of closing an ESOP is much higher than getting a third-party deal.
  • If a company is providing ESOPs to the employees, then annual statements of their ESOP accounts, as well as a summary plan description, are sent to all of them. This is the part of the employee ownership that promotes the company culture, thus strengthening the core of the company.
  • The main reason for a company to provide ESOPs to its employees is that it will keep them motivated. As the company’s valuation will increase, so will the value of stocks, which means more monetary value when the employees decide to liquidate the ESOPs. So, it works as a constant source of motivation which increases the overall productivity.

Why Should a Company Provide ESOPs?

ESOPs are one of the best ways for a company to get tax benefits. If a company is providing ESOPs to its employees, then the company does not need to pay tax. In this case, the employees need to pay tax based on the monetary difference between the buying stock price and the selling value of the stock. So, providing ESOPs to the employees comes with the biggest advantage of tax savings, especially for tech giants.

If an employee wants to liquidate the ESOP within one year of the plan, then he or she has to pay a short-term capital gain tax for the profit made through the sale of the stocks. But if the ESOP is liquidated after a year, then no tax is charged as it is seen as a long-term capital gain. Your employee is likely to stay with you for more years if you provide them a considerable number of shares through ESOP. If the monetary value keeps on increasing, they have more reasons to stick with your company. Allocating ESOPs to employees is a way to make sure that the employees are loyal to the company.

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Successful Tech Companies That Provide ESOPs

  • Google:

Google offers its employees GSU (Google Stock Unit) instead of the ISO (Incentives Stock Options). In the case of GSU, it increases for an employee as the performance of the employee becomes better. GSU affects a Google employee in three ways, i.e., an effect on the base pay, impact on the performance/bonus pay, and scalable based on employee slotting.

  • Amazon:

Amazon’s stock ownership plan is not for everyone as the company offers stock to those employees who are going to stay with Amazon for a long time. Many former employees also mention that it can be a place where freshers find it hard to adjust as there are highly motivated people working around the clock competing for a promotion. Amazon’s base salary is the same for an SVP and a lowly L6 SDE as Amazon considers the base pay as their minimum wage. But, if any employee wants to be eligible for ESOPs, they truly have to be very hardworking and passionate.

  • Microsoft:

Apart from the direct compensation by Microsoft, the company also gives a certain number of stocks at a discounted price to its employees. For employees, this is a better option, but one negative aspect of this approach is that the IRS considers the discount as part of the employee’s salary. In general, Microsoft grants a certain amount in dollars for stock. When the ESOP is offered, the amount is converted into the number of shares based on the current stock price. The amount of grant money depends on the employee’s performance and job position.

These are some of the tech giants from the pool of companies that have started providing ESOPs to their employees. Offering ESOPs is an excellent way for the management to gain employee loyalty and ensure better productivity at work. In the coming years, it is expected that more companies in the tech space will start offering ESOPs to their employees in addition to regular compensation.