SIERRA ESOP PLAN

After a two-year hush caused by the pandemic, SIERRA organized a Town Hall Meeting in July 2022. During this yearly event, the management pleasantly surprised the employees by disclosing its Employee Stock Ownership Plan (ESOP) announcement.

Companies share their profits by offering Employee Stock Options. Employees will understand that it is an opportunity to earn windfall gains with a small investment.

The employee stock ownership plan (ESOP) is a benefit plan that allows an employer to show appreciation for long-serving employees by offering them partial ownership of the company they are part of today. A few employees will receive shares, and as the company grows, the shares will generate wealth in the long run, besides appreciating based on the market sentiments.

The Management Board may dilute a specific number of shares offered to eligible employees as ESOPs at a meagre base price and make them the beneficiaries. The management can make a prudent decision wherein preference is given to long-serving employees and outstanding performers who need to be recognized and rewarded.

Once the ESOPs are issued, they remain in the ESOP pool for a specific period, known as the vesting or lock-in period. Employees will be encouraged to continue working at the company during the vesting period and meet the specified individual performance criteria: vest, exercise, and obtain the ownership of the shares.

The brighter side is that after exercising, employees have the right to liquidate the ESOPs if they decide to leave or if the company offers to buy back the shares as per the policy. Typically, companies offer shares at a base price so that employees can make handsome profits when they sell them.

To know more about this, let us take a closer look at the several ESOP benefits.

Mr. Giridhar, CEO, explains how ESOP will benefit employees

Through ESOP, employees benefit in the following ways:

• Provides a sense of Ownership: When employees get ESOP, it helps them stay motivated as they get a stake in the company’s growth and profit. It also gives the employees a sense of ownership and belonging because it gives them the right to own a part of the company’s share capital.
• Wealth Creation: A part of the profit earned by the company is distributed among the shareholders as dividends from time to time. The employees can earn additional income and benefit directly from their contributions toward the company’s profitability. Therefore, ESOPs help employees create true financial wealth for themselves. They can sell their shares at the current market value, which can be significantly higher depending on the company’s outlook, growth, and market potential. ESOP gives them the option to create a handsome corpus.
• Invest in the company at a discounted rate: When exercising the ESOPs, employees usually pay meagre amounts as companies offer shares at face value allowing employees to invest in the company at a discounted rate.

Mr. Shanmuga Sundaram, Chairman,
delved into the importance of teamwork, and how reinvesting the profits resulted in ESOP

The prime benefit for an employee is when the company gets listed in an IPO or during a Merger & Acquisition event.

The primary benefit for employees is that during an M&A, software companies with a good track record are valued at a high premium. And considering such a consistent track record, the acquiring companies may acquire the shares at a higher premium, which directly benefits employees who choose ESOP.

The market trends indicate that software companies command a higher premium in most IPOs. Subsequently, employees with a long-term commitment to the company would reap the benefits subject to market conditions.

Therefore, from an employee’s perspective, this is a critical milestone as the vested ESOPs may be exercisable (if vesting is linked to the IPO). And shares will be encashable at the market price, which might be much higher than the exercise price paid.

Since ESOP can be considered a long-term capital gain, ESOP holders get a sizable tax advantage as well when they sell their shares after holding them for a year or more and can avail of indexation benefits too.

ESOP buybacks can be used to reward employees for their contribution to building the company. So, when an employee exercises the vested options after the standard vesting period, companies may decide to buy back the vested options at the current fair market value (FMV) of their shares, helping employees achieve tangible returns.

Apart from employees, customers and partners of companies with ESOPs enjoy:

• Better Customer Service. Customers will receive better service when working with companies with ESOPs where there is a shared interest in the growth and success of the organization. Customers will see elevated service at every touchpoint right from reception (entry-level) to the C-suite, which is a tangible result of working with stakeholders who have a vested interest in the company’s success, which will also benefit partners associated with a successful organization in the long run.
• Increased Employee Engagement and Retention. Customers of companies with ESOPs are more likely to see experienced, highly productive employees in the workplace because the model encourages employee retention and tenure. Engaged employees with a stake in the company’s financial success translate to superior business performance. As a result of the permanent workforce, customers will have the assurance that there will be no disruption/consistent support for their projects.
• Consistency in Long-term Relationships.Companies with ESOPs are well suited to provide business continuity and succession planning, meaning their distributor, supplier, and customer relationships remain uninterrupted year after year. Ensuring the long-term success of both the ESOP and its business partners is paramount to the model.