The Ultimate Guide to an Employee Stock Option Plan (ESOP)

The Ultimate Guide to an Employee Stock Option Plan (ESOP)

The Ultimate Guide to an Employee Stock Option Plan (ESOP)

Introduction to Employee Stock Option Plan (ESOP)

We have all heard of an employee stock option plan / employee stock ownership plan or ESOP in abbreviation, but how does an ESOP scheme work in practice, and how do you determine if it’s suitable for your company? In this article, we will provide the basic guidelines of an ESOP plan and how it works so you can see if it might be a viable solution for your business.

What is an Employee Stock Option Plan (ESOP)?

An employee stock option plan or ESOP for short, is one form of remuneration given to employees, by means of retaining them or to reward them based on their performance. They are usually offered in the form of company shares which gives the employee ownership rights as a shareholder of the company. As part of an ESOP scheme the employee is able to acquire the shares at a predetermines price, or what we call an exercise price.

The Lifecycle of an ESOP scheme

The lifecycle on an ESOP scheme can be broken down into a few events; Offer, Vesting, Exercise, Leaver and Lapse. An employee will firstly accept an ESOP option offering, whereby a fixed number of options will be allotted to them. After a certain timeframe, a proportion of the allotted options will vest, which means that these options can now be exercised.

To exercise these vested options, the employee will pay the total exercise cost (number of options x exercise price) and receive actual shares of the company thereafter. If they don’t exercise these vested options after the expiry date, these vested options will lapse or expire, meaning the participant can no longer exercise these options moving forward. If the employee leaves the company halfway through the ESOP’s lifecycle, in some cases, all their vested and unvested options will lapse completely. This will depend on the particular company’s employee stock option plan rules.

Why would companies adopt an Employee Stock Option Plan (ESOP)?

Companies who want to grow their business whilst mitigating costs will usually adopt an ESOP plan. The this is driven by two primary reasons:

  • Employee performance is directly linked to company performance and thus employee remuneration. Employees can only benefit from their ESOP when the market price of the company is above the exercise price which means that a company needs to grow in order to spur the market price of the share.
  • There is no heavy upfront cost to the company. Cost to the company in this case is only incurred during the exercise of option. Furthermore, the exercise cost will be covered by the employee so it’s a win win for companies looking to grow whilst mitigating costs.

How do employees benefit from an ESOP?

When employees are rewarded with shares of the company, they essentially become part owners in the company. This in turn has a direct correlation with employee performance and investment in business performance. The employee’s actions, decisions and work output are all focussed on the greater good of the firm as this is mutually aligned with their own rewards.

Employee Stock Option Plan (ESOP) Illustration

To provide an illustration, say on 1st Sept 2019, Mei San has accepted her company’s ESOP 2019 Offer for 900 options with an exercise price of S$ 1 per share. These options will vest annually across 3 years in equal proportions. The expiry date of the options will be 10 years from the offer date, which will be 1st Sept 2029.

ESOP 2019 OfferVesting DatesOptions to be vestedUnvested OptionsVested Options
Allotment Day1st Sept 201909000
Vesting 11st Sept 2020300600300
Vesting 21st Sept 2021300300600
Vesting 31st Sept 20223000900

A few points to take note of in the table above:

  • On 1st Sept 2019, 900 options are allotted but remain unvested, which means Mei San cannot exercise these options
  • On 1st Sept 2020, 300 have vested meaning Mei San can exercise them by paying the exercise cost of S$ 300 (300 Options x S$ 1) to acquire 300 shares of the company
  • After 1st Sept 2029, all vested options will lapse, if Mei San has not exercised them prior to this date she will not be able to do so, they have effectively expired
  • If Mei San leaves the company to join another firm halfway through, all vested and unvested options shall expire upon notice of resignation

Other variables to consider:

The illustration above is only one of many examples. Common variables that change include:

  • Inclusion of a performance matrix, where the number of options to be vested will depend on the employee’s work performance
  • More frequent vesting (e.g. Bi-annual), to entice employees with “more” reward
  • Broad-based share option plan where all employees are offered the options plan to encourage ownership thinking across the company
  • Some companies may allow retirees to continue to hold on to their vested options until the expiry date

Depending on your company’s requirements, you will need to understand the implications of these variables, and whether they can help achieve your ultimate objective of your employee stock option plan (ESOP).

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Why you should be considering an Employee Share Plan amidst Covid-19

Employee Share Plan Amid Covid-19

Why you should be considering an Employee Share Plan amidst Covid-19

Market Outlook

In this article, we will be exploring the implementation an Employee Equity Plan as a viable option for companies looking for solutions to survive the economic downturn & long-term employee retention post Covid-19.  As the spread of the Coronavirus curbs we seem to be facing another crisis, a global economic downturn, one in which we are already seeing companies making job/pay cuts across the board. In Singapore specifically Gross Domestic Product (GDP) is expected to shrink by 7% in 2020.

The news has been dominated by stories of blue-chip companies like HSBC who introduced pay cuts to their executives for the next 6 months. Coworking space giant, WeWork, has laid off 2,400 of its employees. Devastating as these stories are, the actions taken are not new measures for coping with an economic downturn. Similar actions were taken both in the 2008 Financial Crisis and the 2000 Dot-com bubble.

We should ask ourselves, are these actions ideal given we’re now 10+ years on and still adopting the same measures for navigating through an economic downturn?

Covid-19 Pandemic Response Consequences

History tells us that taking these cost-cutting measures to keep businesses afloat during times of financial difficulty comes with severe consequences.

Some of these consequences include:

  • Voluntary resignations as a result of reducing your current workforce. A 1% reduction in your current workforce can result in a voluntary resignation increase of 31% the following year
  • Drops in job satisfaction and performance. When you impose a layoff, survivors will experience a 41% drop in job satisfaction and a 20% drop in job performance
  • When you introduce a pay cut, it will adversely affect job performance

The driving factor for these consequences is that it causes employees to lose control over their employment and any survivors will be stretched to fulfil business requirements. This will only further impact job performance and increase voluntary resignation due to plummeting job satisfaction.

Why an Employee Share Plan Incentive Scheme could be a viable solution

So, if we know the current solutions are not having positive long-term effects on businesses then what can be done? An effective solution could be the implementation of an Employee Share Plan.

We’ve detailed below some options and their benefits to companies:

  1. Introduce long term incentive schemes. To replace short term cash bonus with an employee equity plan or share option scheme, allowing financial liquidity.
  2. Revise current employee share plan. To increase rewards to employees who enhance (or reduce) company’s cost structure and increase operational efficiency during an economic downturn.
  3. Revise current performance metrics. Lower the Total Shareholder Returns (TSR) to an achievable level and increase time frame for performance evaluation.
  4. Bottom-Up approach. To offer long term employee incentive schemes to lower management people.
  5. Adopt a bonus reserve, to fund incentive schemes.
  6. For start-ups who are looking to drive company growth an Employee Share Option Plan would be an effective way to incentivise staff towards a common goal and subsequently drive growth.
  7. For start-ups with an existing Employee Share Option Plan (ESOP) but are looking to offload administrative burden and maximise the workforce on revenue generating initiatives, should outsourcing their ESOP.

The overarching objective for each of these is to incentivise critical business units to perform at a high level in order to weather any economic downturn.

Key to Success for Share Incentive Schemes

Like any challenging situation key to success is being razor sharp in everything you do. In the face of an economic downturn it’s not always every sector that is impacted. Industries like Healthcare Services, Technology Equipment, Software and IT Services are expected to benefit from this current pandemic and will continue to perform well.

Don’t get swept up in the emotion of sensationalised media headlines showcasing devastating job losses and pay cuts globally. Stick to the facts. A recent study conducted by AON has shown that only 10% of companies across Asia have implemented pay cuts amid the COVID-19 pandemic.

If you are in a sector that has been impacted and you need to make changes, don’t default to traditional measures (think job/pay cuts) consider your motivations for the changes you need to make and then evaluate if an employee share plan could be a solution for you.

Some key questions to consider when evaluate if and what type of share plan is suitable for you are:

  • Is your company looking into rewarding employees based on long-term achievements?
  • Are you looking into instilling ownership thinking into your employees?
  • Is your company looking into replacing short term cash rewards, with long term equity rewards?
  • Are you looking into driving different employees into achieving specific outcomes (i.e. TSR, ROE, Client Retention etc.)?

Remember that an employee equity plan scheme is not a short-term win but a long-term business strategy. Surveys conducted by AON have shown that 75% of companies who adopt a long-term incentive scheme will continue to utilise it. Be Open Minded. Realise the potential from your existing workforce and seek solutions to capitalise their performance and secure a business future.

Looking For A Trusted Employee Share Plan Firm In Singapore?

We have designed an all-rounded encompassing solution comprising of an experienced Share Plan team of practitioners and a digital solution to help you manage your strategic initiative.

01 Learn more about EmployeeServe - our Employee Plan Services platform!

Contact us today to find out more about our class-leading solution.

Or you can also learn more about our Employee Stock Option Plan (ESOP) services here.

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What is an Employee Share Plan? (ESAS vs ESPP)

What is an Employee Stock Option Plan (ESOP)?

What is an Employee Share Plan? (ESAS vs ESPP)

Based on reports from a survey conducted by Workday and published on Human Resource Directors, Singapore’s job market currently has an expected turnover rate of 46% per annum, the highest across Asia Pacific. Given this alarming statistic, employment retention is key for companies to grow and maintain a competitive advantage with their best minds running the entity with in-depth, industry specific skills and experiences. To attack this issue effectively, we are seeing a surge in companies adopting an Employee Share Plan (ESP). As a result, not only are employees retained, they are also incentivized to work towards company’s objectives and not of their own.

An Employee Share Plan is essentially a remuneration package, where employees are rewarded with company’s ordinary shares, either by subsidy or free of charge, after certain performance criteria have been fulfilled. Some examples of an Employee Share Plan include Employee Share Award Scheme (ESAS) and Employee Share Purchase Plan (ESPP). In this article we will discuss each in detail to demonstrate their differences.

Employee Share Award Scheme (ESAS)

This plan is usually given to directors or upper level management, where the employee is rewarded with ordinary shares of the company, if they fulfill certain criteria or performance metrics set forth by the company. Initially, the participant (director or senior manager) will be allotted X number of restricted shares. At each vesting period (usually annually), a proportion of the allotted shares will be vested and become unrestricted shares, where the participant can then enjoy the benefits of owning an actual share (i.e. Sell, Voting Right, Dividend Pay-out). The number of shares to be vested and turned into unrestricted shares, will depend on the participant’s performance during their evaluation period.

There are two types of ESAS, namely a Performance Share Plan (PSP) and a Restricted Share Plan (RSP). They can be summarized as follows:

 

Types of ESASPlan DurationVesting PeriodPerformance MetricParticipantTarget Companies
PSP3-5 YearsEnd of Plan (With Annual Evaluation)– Total Shareholder Return

– Return on Equity

– Return on Sales

– Market Ranking

– Directors

– Non-Executive Directors

– Senior Manager

– Head of Department

– Listed Companies (Including Mainboard and Catalist)
RSP3 YearsAnnually– EBITDA

– Economic Value Added

Case Study 1: Restricted Share Plan (RSP)

Jack Li (Employee of Jack Manufacturing Company) has recently joined the Jack Manufacturing Company Restricted Share Plan (RSP), where he was allotted 1,000,000 shares on 1st April 2020. The RSP plan spans across a 3-year duration with 2 vesting periods. The first vesting date is 2nd April 2022, where 50% of the allotted shares will be vested and become unrestricted shares, based on Mr. Li’s performance from 2nd April 2020 until 1st April 2022. The second vesting date is on 2nd April 2023, where the remaining 50% of the allotted shares will be vested, depending on his performance from 2nd April 2020 till 1st April 2023. His results are summarized as follows:

 

Vesting Period2nd April 20222nd April 2023
Performance Metrics95%100%
Vested450,000500,000
Unvested50,0000
Total Awarded450,000 + 500,00 = 950,000

 

Upon the first vesting period, Jack only managed to reach 95% of his pre-set target, therefore, the Remuneration Committee (RC) decided to vest only 450,000 shares, of the allotted 500,000 shares for that time period. The remaining 50,000 shares will either be placed back in Jack Manufacturing Company’s treasury account or to be evaluated again towards the second vesting period. For the purpose of this example we will assume that the unvested 50,000 shares are being placed back into Jack Manufacturing Company’s treasury account for simplicity.

Upon the second vesting period, Jack performed well and managed to reach his target, thereby having all 500,000 shares vested accordingly.

In conclusion, Jack has a total of 950,000 Jack Manufacturing Company’s ordinary shares by end of 2nd April 2023, that he can either sell it or keep. If he chooses to keep the shares, he will enjoy voting rights and receive dividend payment as and when due.

Companies who adopt such a plan usually aim to ensure that shorter term (i.e. Annual) goals are being met and satisfied. As opposed to PSP, where longer term goals are the focus, see below for this case study.

Note: As a rule, companies will only allot shares up to 15% of company’s current outstanding ordinary shares at any time, to all its eligible participants, to prevent overpowering of any form.

Case Study 2: Performance Share Plan

Sarah Perry (Employee of Jack Manufacturing Company) recently joined the Jack Manufacturing Company Performance Share Plan (PSP), where she was allotted with 1,000,000 shares on 1st April 2020. On an annual basis, she will be evaluated and will be given a score card. The average of all scores spanning across 3 years, will determine the final number of ordinary shares awarded. It is worth pointing out that the scores she receives in one particular year will not affect her scores of other years.

Her results are summarized as follows:

 

Evaluation Date (Annually)2nd April 20212nd April 20222nd April 2023
Score Card95%110%65%
Average score across 3 years(95% + 110% + 65%) / 3 = 90%
Total Awarded1,000,000 x 90% = 900,000 Ordinary Shares

 

In conclusion, Sarah has a total of 900,000 Jack Manufacturing Company’s ordinary shares by the end of 2nd April 2023, that she can either sell or keep.

Note that in some companies, a Claw-back Policy may be introduced. This policy will require the individual to return a certain number (if not, all) of the rewarded ordinary shares, should the performance achieved be deemed unsustainable, for a set number of years post the PSP Plan.

Companies who adopt such plans usually aim to ensure that longer term goals are being materialised, as opposed to RSP, where shorter term goals are the focus. In addition, such policy will incentivise the individual to constantly reflect and improve on the strategies adopted, to ensure sustainable performance for the long haul.

Employee Share Purchase Plan (ESPP)

This plan is offered to all employees of the company. The company will effectively subsidize employees in purchasing ordinary shares of the company.

On a monthly basis, a portion of the participant’s (employee) gross income will be automatically deducted and placed in a separate account (sitting with the company) for a minimum period of one year. By end of the year, the participant either has the option to use those funds to purchase ordinary shares, or have it transferred back to participant’s own account. To incentivize participants to partake in this scheme, companies would offer an advantageous interest rate, for the funds being set aside. Therefore, there is benefit to the employee even if they don’t proceed with purchasing the company’s ordinary shares. There are also other cases where companies will subsidize 25% of the total cost spent by the participants when making the share purchase. Some companies would even use their own funds to purchase x ordinary shares, for every x number of ordinary shares purchased by the participants.

Conclusion

Different types of plans will serve companies of different sizes and nature. But the core purpose remains the same, which is to retain the best minds, drive long term growth and be the market’s next game changer.

Find out more on the key benefits of having an Employee Share Option Plan (ESOP) or learn about the challenges of ESOP implementation and how to conquer them.

Looking For A Trusted Employee Share Plan Firm In Singapore?

We have designed an all-rounded encompassing solution comprising of an experienced Share Plan team of practitioners and a digital solution to help you manage your strategic initiative.

01 Learn more about EmployeeServe - our Employee Plan Services platform!

Contact us today to find out more about our class-leading solution.

Or you can also learn more about our Employee Stock Option Plan (ESOP) services here.

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Top 5 key benefits of having an Employee Share Option Plan (ESOP)

Top 5 key benefits of having an Employee Share Option Plan (ESOP)

In today’s marketplace, attracting and retaining top talent poses constant challenges. Gone are the days of your traditional 9-5 job and with it your 9-5 employee. Technology has meant we’re now more connected than ever and we are always ‘on’ regardless of whether we’re physically in the office or on holidays. These changes have created a whole new generation of employees that demand more from their organisations and not just in the form of benefits but through an alignment of personal goals and values. This shift in mental state has also created a highly competitive marketplace where retaining top talent is key to a healthy P&L.

Employee Share Plans have long been seen as a way to align your business goals with employee values in addition to driving productivity and aiding retention. In this article we will explore the top 5 benefits of having an Employee Share Plan in place and how it can benefit your business and retain talents within your company.

1. Promotes employee Involvement

The first benefit is perhaps one of the most important but also one of the most misunderstood values of implementing an Employee Share Plan. Simply put, if you align your workforce and your organisation with a common goal it promotes engagement, invites innovation and drives productivity and profitability. All due to ensuring your employees have a sense of ownership. The implementation of an Employee Share Plan ensures that your employees don’t feel like a cog in a machine, but feel they play a fundamental role in business success. That success then becomes tangible when they see the impact to their Employee Share Plan when the company’s stock price improves.

2. Improved recruitment and retention

Companies that adopt an Employee Stock Ownership Plan (“ESOP”) have seen much better retention rates due to the long-term benefits associated with having an ESOP. Employee Stock Ownership Plans provide employees with ownership interest in the company. Typically, the longer they stay with the company the greater the benefits which is why they can be used in the facilitation of succession planning.

ESOPs can often have tax benefits for employees and company alike so are typically implemented as part of a corporate finance strategy. This makes ESOPs a desirable piece of any employee package and as a result aide in retention of employees. In addition to this with the right Employee Stock ownership Plan a business can create desire within top talent, ultimately benefiting your business.

3. Ability to generate liquidity while maintaining control

If you want to generate liquidity for your business but are concerned about losing the operating control that comes along with selling to a third party then an Employee Share Plan might be a viable solution. With an Employee Share plan in place, owners can choose to sell a minority interest, as little as 20 percent, which will generate the liquidity needed.

The benefits associated are not just for the business owner in this scenario, in the case of employees, it enables investment opportunities that might not otherwise have been viable. Many employees do not have the cash to buy shares, a business who implements an Employee Share Plan changes this through the setup of a trust and selling to their employees. Employee’s will then receive shares over time as a retirement benefit.

4. Flexible and tax savings

Employee Share Plans are often used as a part of a corporate finance strategy for their obvious tax deduction benefits. Many regimes around the world today provides a tax-deductible status for company stock contributions, dividends and cash contributions. Their inception was driven by a need to give employees an opportunity to reap rewards from an increase in the value of the company they work for. In doing so, it also encourages loyalty to a company as well as a vested interest in delivering good work which will grow the company.

5. Differentiation from competitors

It is to be expected that a major benefit of having an Employee Share Plan in place long term is the impact on corporate culture. If you have successfully implemented an Employee Share Plan, strategically aligning your employee and shareholder values, you are bound to see dividends in output due to the sense of ownership. All business operations and interactions will be conducted by a team who is engaged and truly cares about the business beyond their personal monthly paycheck.

This shift in mindset will have long term benefits for the company, fundamentally shifting their corporate culture and creating differentiation in the marketplace. Not only will you become a desirable place to work but your productivity, profits and employee engagement will all increase. Over time, this can become a significant competitive advantage.

Looking For A Trusted Employee Share Plan Firm In Singapore?

We have designed an all-rounded encompassing solution comprising of an experienced Share Plan team of practitioners and a digital solution to help you manage your strategic initiative.

01 Learn more about EmployeeServe - our Employee Plan Services platform!

Contact us today to find out more about our class-leading solution.

Or you can also learn more about our Employee Share Option Plan (ESOP) services here.

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Top 5 challenges with Employee Share Option Plan (ESOP) Implementation and how to conquer them

Top 5 challenges with Employee Share Option Plan (ESOP) Implementation and how to conquer them

Employee Share Option Plans or Employee Stock Ownership Plans (ESOP) are gaining popularity in today’s market. The driving force behind this is a competition for top talent and the need to incentivise and or boost productivity among our workforce, not to mention incentivise and reward staff for staying with your company long term. In addition to this the traditional methods of employing one-off short-term financial rewards have been under scrutiny in the past decade (financial crisis 2008 anyone?) as they have been proven to promote short term & high-risk decision-making behavioral tendencies.

So, Employee Share Plans seems like a win-win for companies and as a result it’s not surprising that companies continue to find alternative avenues under the Employee Engagement framework to hire and retain staff in the longer term and help promote specific behavioral traits in line with company culture through the implementation of an Employee Share Plan.

Whilst we have seen an increased uptake of this emerging trend, many still struggle to optimise and reap the intended benefits of an Employee Share Option Plan program largely due to concerns over several perceived challenges.

#1 - Mobile participants due to the emergence of a Global Workforce

With the world becoming ever more globalized it’s not surprising that our workforce has followed the trend. This globalization of the workforce has posed challenges for companies deploying global Employee Share Option Plans for a variety of reasons. Currently, global participants need to go through tedious administration processes with HR to set up their Central Depository (CDP) account, receive physical offer letters and have near zero visibility on their equity plan information in real time.

As a result, we have seen some global participants go as far as taking leave to travel to the respective equity issuing country to open their share depository accounts with the local exchanges to enable transmission of shares in their name. This process is not only tedious it’s completely impractical and unnecessary with the right partner.

#2 – Manual Administration and Management of Employee Share Option Plans

Believe it or not, in this digital age most companies still manage their Employee Share Option Plans on a spreadsheet. Whilst spreadsheets are known to be robust and “excel” (*pun intended) in capturing static information for operational purposes they have a drastic impact on ease and efficiency of implementation and administration of Employee Share Option Plans.

User expectations are shifting drastically, we all demand “relevant and insightful” access to information “anytime and anywhere” at our convenience. In answer to this, it is imperative to find a dynamic solution to capture, process and report information in real-time to enable participant visibility and reach without creating a manual resource drain.

#3 – Misalignment on Perception of Employee Share Value

Whilst many companies and employees have seen the benefit of adopting an Employee Share Plan, uptake across ASEAN is slower as employees continue to value cash reward as a variable incentive plan.

The current behaviors from a cultural standpoint are more aligned towards short term instant gratification due to a lack of understanding of how equity is a form of reward and recognition for their efforts. The “cash is king” mentality still reigns supreme, and we all know the risks associated with this mindset.

#4 – Lack of Internal Resources & Capability to Manage Strategic Imperative

This is potentially the Achilles heel of successful implementation and administration of Employee Share Option Plans, a mindset that this is a box ticking exercise and no different to periodic transaction activities like payroll.

This can be due to any number of factors, a lack of cultural acceptance within the organisation of equity plans or it’s seen as a cumbersome task. Typical management of Employee Share Option Plans on a spreadsheet can be extremely tedious and, in the more complex cases, a full-time job for 1 full time equivalent. There is a wealth of time-consuming administrative processes that need to happen; the offer management process, vesting management, record keeping of participant information, liaising with participants on plan mechanism, leaver management, regulatory reporting, the list goes on. Many HR Practitioners don’t realise there is an alternative solution to the manual labour currently associated with administrating equity plans.

#5 – Traditional Record Keeping Solution

Most solutions in the marketplace today are designed for functional purposes only, they provide static data and are table driven. This is not surprising given most were designed with the sole aim of record keeping and generating reports for Financial Reporting, Payroll Tax Computation & Reporting.

What is surprising is that there is a global push in nearly every industry sector to focus on user experience. Especially in relation to employee engagement strategies, employees just demand more today, for Share Plans participants need to have real-time information access, share price movement, a one-stop integrated trading platform, and historical information for individual income tax declaration purposes. We live in a digital era and any solution that doesn’t embrace this is considered obsolete very quickly.

Looking For A Trusted Employee Share Plan Firm In Singapore?

We have designed an all-rounded encompassing solution comprising of an experienced Share Plan team of practitioners and a digital solution to help you manage your strategic initiative.

01 Learn more about EmployeeServe - our Employee Plan Services platform!

Contact us today to find out more about our class-leading solution.

Or you can also learn more about our Employee Share Option Plan (ESOP) services here.

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