INTRODUCTION
ESOP or Employee Stock Ownership Plan is a non-monetary incentive wherein employees are made avail of choice regarding the shares of the employers. They are primarily aimed at the mobile salary class in order to motivate, recognize, compensate, and keep highly efficient employees.[1]
Louis Kelso introduced this strategy in the United States of America in 1956. This attorney/bank investor initiated the first share transfer to workers, which became known as The Kelso Plan. Following this, in 2010 the United States approved ESOPs, within the ERSIA (Employee Retirement Income Security Plan) Act. [2]The reason for this is the foresight of the failure of the Social Security Act, which was signed and approved by President Roosevelt in 1935.
EXPECTED RESULTS OF ESOP
Common outcomes seen after implementation of this plan is increased job satisfaction, organisational commitment, identification, motivation, and workplace participation in firms that simultaneously increase worker participation in decision making. Although high-profile cases magnify possible risks due to a lack of diversification, most employee-owners are less vulnerable than their counterparts.[3]
WHY ESOP ADOPTION IN INDIA
India has one of the world’s largest populations, with young people of working age constituting the majority of the population. That is, there is a high quantity of labour and thus high competition among labours. Because of the abundance of labour in India, human capital has become the least valuable asset in Indian businesses. Because everyone is replaceable, no employee need or demand is acknowledged or met.
As a consequence, all of these employees labour not for the sake of passion or achievement, but rather to meet their daily basic needs. As a result, there is little to no job satisfaction, and the labour is of such a nature that it is both poaching and brain draining.
As a solution to these problems, ESOP was implemented in India. The idea was to make workers feel like they were a part of the company, which would increase their job satisfaction and in turn increase efficiency within the company.
EFFECTS OF ESOP ADOPTION IN INDIA
The methods in which ESOP can be adopted by a company is if private (not publicly traded company’s) then by following the Companies Act of 2013 (Section 2(37)) and the Companies (Share Capital and Debentures) Rules of 2014. If Public company or when issuing employee stock options, listed companies should observe the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines. [4]
The Indian economy has been positively impacted by the adoption of this plan. Both employers and employees have been benefited in the long-term due to the implementation of the plan. As it has fostered a stable relationship, associability, and confidence between the two parties, thereby increasing the firm’s performance and productivity. Thus, improving the financial performance of the company. [5]
However, as the implementation of the plan in this country is relatively new there remains a gap in proper implementation of the plan that can be seen in the lack of precise regulation, reactive nature of regulators, accounting system confusions and delays in actual realisation of benefits.[6] This gap however, can be easily filled with passing time as India grows more comfortable with the plan so-much-so that it is able to recognise its faults and eliminate them.
ESOP ADOPTION IN OTHER COUNTRIES
Untitled States of America: In a study conducted in a USA based company results showed that in addition to the ESOP, employees must be provided a more personal incentive (in the form of employee friendly policy’s or any other incentive) to increase their participation in the business. Furthermore, they identified free rider to be a problem resulting from implementation of such plan.[7]
France: A French Company Experiment concluded that The economic contribution of ESOPs could then be realised through the development of organisational social capital, provided that engaged costs do not exceed benefits. There is still room for clarification on the topic of ESOPs’ organisational costs. This is most likely why actual results remain inconsistent. Despite this, the dataset that was made available enabled this research to progress. True, success and risk metrics are linked to ESOP variables.[8]
Japan: The findings of a study conducted in Japan revealed that ESOPs have a positive impact on employee incentives and business productivity. These findings have implications for study on human resource management practises in Japan and employee ownership research in general.[9]
REASONS FOR DIFFERENCE IN RESULTS OF ADOPTION
- The plan was adopted at different times in different countries.
- The plan was adopted to solve different economic problems that had arose during that time in that specific country.
- These experiments to were conducted with different aims in mind. Therefore, the variable and fixed factors also differed in each experiment hence, the results differed.
- Countries share societal behaviours that range from individualistic (as in the United States and France) to collective (Asian countries Japan and India). Individualistic people only labour for themselves. They only consider their own and their close friends’ opinions and feelings, ignoring all other societal variables. Collective individuals are heavily influenced by society’s perception of them. They consider the likes and dislikes of everyone around them and strive to fit in with them. They are somewhat affiliative in nature. As a result of the differences in how these two types of countries react to the ESOP plan, the results of experiments performed in these countries differ.
CONCLUSION
ESOP is a non-financial plan implemented by a company in order to better employee and employer relationship and to ensure better performance by employees. The experiments checking the effectiveness of this plan conducted in the different countries had varying results some in support and some against the effectiveness of the plan.
These experiments all had different fixed and variable factors. This is an exact replica of how this plan has been adopted by every country. Each country had adopted the plan to solve a different economical problem therefore the fixed and variable factors existing within the economy at that time differed for each country. It was therefore obvious that the results would differ too.
[1] Sonali B. Ramchandani and Dr. Hemal B. Pandya, Evaluating the Effect of Employee Stock Option Plans on the Financial Performance of Indian Construction & Infrastructure Companies, Volume- 9, Issue- 4 (August 2019), https://www.researchgate.net/publication/336994026_Evaluating_the_Effect_of_Employee_Stock_Option_Plans_on_the_Financial_Performance_of_Indian_Construction_Infrastructure_Companies.
[2] Steve F Freeman, Effects of ESOP Adoption and Employee Ownership: Thirty years of Research and Experience, University Of Pennsylvania, 1rst April 2007, https://repository.upenn.edu/cgi/viewcontent.cgi?article=1001&context=od_working_papers.
[3] Steve F Freeman, Effects of ESOP Adoption and Employee Ownership: Thirty years of Research and Experience, University Of Pennsylvania, 1rst April 2007, https://repository.upenn.edu/cgi/viewcontent.cgi?article=1001&context=od_working_papers.
[4] Employee Stock Ownership Plan, 19th September 2022, https://muds.co.in/rules-for-issuing-esop-in-india-2022/.
[5] Sonali B. Ramchandani and Dr. Hemal B. Pandya, Evaluating the Effect of Employee Stock Option Plans on the Financial Performance of Indian Construction & Infrastructure Companies, Volume- 9, Issue- 4 (August 2019), https://www.researchgate.net/publication/336994026_Evaluating_the_Effect_of_Employee_Stock_Option_Plans_on_the_Financial_Performance_of_Indian_Construction_Infrastructure_Companies.
[6] Sonali B. Ramchandani and Dr. Hemal B. Pandya, Evaluating the Effect of Employee Stock Option Plans on the Financial Performance of Indian Construction & Infrastructure Companies, Volume- 9, Issue- 4 (August 2019), https://www.researchgate.net/publication/336994026_Evaluating_the_Effect_of_Employee_Stock_Option_Plans_on_the_Financial_Performance_of_Indian_Construction_Infrastructure_Companies.
[7] Douglas Kruse Richard Freeman Joseph Blasi Robert Buchele Adria Scharf Loren Rodgers Chris Mackin, Motivating Employee-Owners In Esop Firms: Human Resource Policies And Company Performance, NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2003, http://www.nber.org/papers/w10177.
[8] Stéphane Trébucq, The Effects Of Esops On Performance And Risk: Evidence From France, Corporate Ownership & Control / Volume 1, Issue 4, Summer 2004, http://www.virtusinterpress.org/IMG/pdf/cocv1i4p7.pdf.
[9] Derek C. Jones and Takao Kato, The Scope, Nature, and Effects of Employee Stock Ownership Plans in Japan, LR Review , Jan., 1993, Vol. 46, No. 2 (Jan., 1993), pp. 352-367, https://www.jstor.org/stable/2524877.
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