FAQs

Companies offer equity compensation or stock options to key employees as it creates a sense of ownership in the company. In that sense it also links the financial reward from their stock holding with the performance of the organization. It is very useful in sourcing and retaining employees that are an asset to the company.

It thus works as a –

• Motivational tool
• Compensatory tool
• Performance tool
• Talent hunting tool
• Wealth generating tool
• Matching tool

ESOP is an acronym for Employee Stock Option Plan. As the name suggests, it is the right given to an employee to buy shares of the company at a price fixed on the date of grant. It is also called an equity compensation plan as it often becomes part of the employee’s remuneration. It makes the employee shareholder or owner in the company to the extent of the options held by them.

Not at all. There are several types of equity based compensations (EC). It is entirely the company’s decision to choose the instrument that serves its strategic goals, objectives and constraints best.

RSU is Restricted Stock Units. These are typically stock options granted at deep discount to fair market price or at face value to the employee.

Stock Appreciation Rights (SARs) entitles the holder to take advantage of the rise in the equity price over a given time period. The participant receives the appreciation which the Company settles in Equity.

Phatom are pseudo ESOPs. These entitle the holder to benefit from the rise in the equity price or any other selected parameters over a given time period. The comany transfers the appreciation in value to the employee in the form of cash.

Employee Share Purchase Schemes (ESPS) are broad based ownership plans that allow equity participation to employees at all levels. The employees are given the option to participate and make time based contributions typically from the payroll.This may also be matched by employer contribution. The fund thus collected is utilised to buy equity of the company and is shared with the employees as their contribution to the Plan.

Equity Compensation is an incentivization tool which may be adopted by listed as well as unlisted companies. In fact, there is an increasing trend of unlisted firms interested in Equity Compensation Plans since they can attract and retain better talent.

It is best for your company when it is in the growth stage. This could manifest in any of the following stages:

• Prior to implementing expansion plans.
• When the company is ready to procure funding from VC/PEs.
• Before public listing of shares.
• Anticipation of increase in stock prices because of increase market share, favorable market conditions etc.

Employees who participate in an Equity Compensation scheme feel amuch greater sense of ownership with the copany. They enjoy all the benefits of owning shares of the company be it dividends or price appreciation. As equity holders they become prosperous with the company.

The following laws and regulations dictate the implementation of ESOPs in Singapore.

• Singapore Companies Act 1967
• Mainboard Listing Rules
• Catalist Listing Rules

Pros

• The company gets employees’ goodwill, loyalty and commitment.
• Employees are motivated and feel a sense of belonging with the company.
• Helps attract better talent.
• Reduces attrition rate significantly.
• Can be used to finance growth in a cost-effective manner through its tax-privileged status.

Cons

• It can cause cash-flow issues. If the company borrows money to fund an Equity based Compensation, it will have to allocate substantial future revenue towards repayment.
• Dilutes ownership of the company.
• Hygiene factors like communication, transparency and objectivity are lacking.
• There are often design flaws in terms of vesting conditions, exercise process etc.

Misconception:  Promoters often fear that by establishing an Equity based Compensation, they would lose control over the company. This is a myth. In reality, Equity based Compensation instruments motivate employees to think like the owner of the company. The , decision making control however remains intact with the actual owners.

Share-award schemes involve giving employees actual shares rather than stock options.These are either for free or for less than the market value. The value of shares given to employees is treated as employment income. Often, restrictions are placed on the shares regarding voting rights, participation in dividends and transferability. These are lifted over a period as specified in the scheme.