Maximising performance: the potential benefits and drawbacks of employee share options plans

Maximising performance_ the potential benefits and drawbacks of employee share options plans

Maximising performance: the potential benefits and drawbacks of employee share options plans

Employee share plans are becoming an increasingly popular strategic tool, with over 80% of companies in Asia using them to bolster their competitive edge in the current talent market and align their workforce with their organisational growth trajectory. Equity based remuneration such as employee share option plans (ESOPs) or employee stock option schemes (ESOSs), not only incentivise employees to work towards company’s goals but also increase staff retention rates.

In this article, we investigate the benefits and potential drawbacks of ESOPs for companies in Singapore and provide advice for ensuring successful share scheme implementation.

How ESOPs work

ESOPs grant employees the option to purchase company shares at a predetermined price (also known as the exercise price), often lower than the prevailing market price. After a moratorium or ‘vesting’ period, the employee may exercise their options by buying the shares at the exercise price and become a part owner of the company. The plan rules or an internal remuneration committee generally sets the exercise price and timeframes of ESOPs.

You may also hear ESOPs referred to as employee share option schemes or stock option plans.

ESOP vs. shares: how they differ

ESOPs offer employees the unique opportunity to secure a stake in their company’s future success without the immediate financial commitment required when purchasing shares in a publicly listed company. ESOPs also differ from share schemes like restricted share plans and performance share plans, which grant employee shares as part of their remuneration after a set vesting period once agreed-upon targets are met.

ESOP vs. shares_ how they differ

Top ESOP benefits explained

ESOPs can influence employee attitudes and behaviours in multiple ways, providing benefits to companies and their workers.

The main benefits of ESOPs are:

  • improved employee engagement;
  • increased innovation and productivity; and
  • reduced employee turnover.
Employee engagement
ESOPs can be an effective employee engagement strategy due to the sense of company ownership and an alignment of worker and employer objectives, goals and values. In a recent study of employee equity plan usage in Asia, about 60% of participating workers either agreed or strongly agreed that their personal success and their company’s success were one and the same.

As share value depends on the company’s success, employees are encouraged to put in more effort to improve the company’s market performance and also make decisions that promote long-term value creation rather than short-term gains.
Increased innovation and productivity
When employees feel they play a fundamental role in the company’s growth and can see the tangible effects of share price rises in their share plan, they are incentivised to expand their focus beyond day-to-day responsibilities. ESOPs provide channels for them to ideate, innovate and engage in activities that drive the company forward.

When well-managed and communicated, ESOPs also provide employees with clarity on common goals, which further aids engagement and productivity.
Reduced employee turnover
Research shows that the likelihood of an employee resigning decreases as the value of employee shares rises.

“ESOP participants tend to stay in their job for longer than expected because they know they will be able to reap the rewards i.e. the number of options exercisable after the vesting period. This is even more so, when the share price increases over the years.” explains Nora Jasmine Lai, Operations Manager of Employee Plan Services for BoardRoom.

Alongside the prospect of financial gains, the partial ownership offered by ESOPs also promotes job satisfaction and a sense of belonging.

“When employees are rewarded through their ESOP, it strengthens their sense of recognition within the company and they are part of its growth and success,” Nora explains. “In the long run, this motivates them to grow with the company.”

ESOP-led talent retention has a variety of benefits, including reduced recruitment and training costs, improved business continuity, knowledge retention and the progression of long-term organisational goals.

Potential drawbacks of ESOPs

Depending on a range of factors – such as your organisation type and performance, the quality of plan execution and market fluctuations – ESOP implementation may be challenging or even unsuitable.

Some potential drawbacks of ESOPs include:

Employees must pay for the shares upfront with their own money before receiving shares into their account and realising them as monetary gains. One way companies can alleviate this challenge and exhibit dedication to ESOP goals, is to partner with local banks, who may offer bridging loans to employees, contingent on the immediate repayment of the loan upon share sale.
Employees cannot realise their gains if the share price drops below the exercise price in an economic downturn. They may leave the company before the share price improves, thus losing the opportunity to reap their rewards.
Employees who are not Singaporean residents may be subject to withholding tax when they exercise their options and realise a gain.
ESOP management can become increasingly complicated and time-consuming as time passes, your company grows across borders, and there are more plans to design and keep track of – each with their own vesting periods and exercise price. Compliant administration and reporting must be ensured across all relevant jurisdictions.

Companies can ensure smooth ESOP implementation by engaging a premium ESOP services provider – ideally, one that specialises in a range of complementary corporate services such as tax. Firms that offer customisable ESOP platforms such as EmployeeServe can help to simplify and streamline your scheme management by allowing employees to view and transact on holdings in real time.

Factors to consider before implementing ESOPs

Factors to consider before implementing ESOPs

If you are implementing ESOPs in your organisation for the first time, meticulous planning is essential.

Management staff should consider the following ahead of the design phase:

  • What are your organisational needs and objectives, and how can ESOPs help you achieve them?
  • What percentage of the total number of shares will be set aside?
  • How will the vested options of departing employees be treated?
  • How will employees manage or assess their ESOPs?
  • Will you implement a digital ESOP management system? If so, is it user-friendly enough?
  • Is a share custody account required for overseas participants?

An experienced ESOP services provider can explain how ESOPs work, answer your questions about ESOP implementation, and guide you through the design process to help tailor the plan to your specific needs.

If you already have a share scheme in place and want to review it, the best way to do this is to partner with a leading ESOP services provider. ESOP specialists have the knowledge, skills and technological know-how to update your scheme to align with your business goals.

Tips for successful share scheme execution

Tips for successful share scheme execution

According to Nora, effective ESOP implementation requires two things: a quality platform and strong communication from HR and management.

“Often, employees don’t understand their role in a huge scheme,” she says. “There is often too much jargon and complexity tied to the scheme, which stops people from understanding the benefits they can reap.

“But as a part owner of the company, they want to do more and understand their role in the entire cycle.”

A purpose-built platform helps employees understand how the scheme works, especially if it is easy to use and supported by regular communication from HR and the broader company.

“The system can release regular communications, such as newsletters, to allow employees to keep track of the goals set via the scheme,” Nora says. As a result, employees stay more focused on progressing long-term organisational goals.

Personalised employee share options services

When executed thoughtfully and managed effectively, employee share options can catalyse sustainable growth, benefiting both employees and the business as a whole.

For businesses in Singapore seeking to implement or refine their share scheme, BoardRoom’s premium ESOP services offer a reliable end-to-end solution. With over 60 years of experience and a deep understanding of the local business landscape, we can assist in creating, implementing and managing ESOPs that align with your organisation’s goals and values.

Our highly sought-after ESOP services give you access to:

  • a dedicated ESOP platform, EmployeeServe, empowering you to navigate the complexities of ESOPs with confidence so that employee satisfaction is achieved and regulatory compliance is assured;
  • in-house experts in multiple aspects of ESOPs, plus a strong network of trusted vendors, including ESOP designers and lawyers, for a seamless, comprehensive service via one point of contact; and
  • share custody accounts for overseas participants, making share trading and the realisation of cash proceeds easy.

Contact us to learn more about our expert ESOP services today.

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