ESOP OR ESPS AS TOOL OF STAFF MOTIVATION - A Suggestion
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We reproduce below the letter of S Srinivasan addressed to CMD of IOB:
Shri R. Koteeswaran
Chairman and Managing Director
Indian Overseas Bank
Chennai – 600 002.
Anthropologists studying Stone Age cultures, or more modern but primitive social structures in remote areas, have found examples of a so-called “gift economy,” in which an abundance of food or other material is shared, causing recipients to feel a moral obligation to give back. Other studies demonstrate that this basic tendency of human nature extends into more advanced and sophisticated social settings, and that the impulse toward “reciprocity” often becomes a moral imperative, even with no express obligation to offer something in return. To fully demonstrate their hypothesis, many researchers shown that the larger the perceived gift, the greater the subsequent improvement in employee performance.
Employers are constantly attempting to motivate employees and generate loyalty. Volumes have been written about the subject, and numerous experts and consultants abound with a wide variety of theories, suggestions and programs.
Most companies are painfully aware of the difficulty in attracting talented staff. Nationalized /PSU banks are no exception . Just as successful sports teams must grow their own talent or attract experienced players from other teams, employers must follow the same path.
It is in this context , Employee stock options are gaining in popularity as a compensation plan aimed at improving work performance.
Employee Stock Options and Ownership (ESOP)are a valuable benefit that companies use to create higher level motivation and dedication. It typically works very well. As employees exercise stock options, they usually become more committed to a company& success. Their stock value hinges on company performance, which, of course, is a direct by-product of employee achievement. Historically, stock options create motivation and dedication for all employees involved as they are more invested in the company and its results. Researchers have shown even during down economies, offering meaningful stock options both attracts better, more talented employees and helps keep them for the long term.
As the cost of all employee benefits continues to increase, companies expand their search for programs that offer high value for moderate cost. Stock option plans often prove to be a strong benefit for employees and cost-effective for companies.
While stock options are seldom substitutes for compensation increases, as part of a solid benefit program, they help make employment packages more attractive. The only significant costs to the company are the lost opportunities to sell some stock at market value (since employees usually buy at a discounted rate) and the expense of administering the plan. Added to the ability to attract, keep and motivate staff, the cost efficiency of stock options helps many smaller companies compete with larger organizations by offering comparable benefit programs.Past studies have shown some positive effects from stock option programs — particularly when it comes to retaining employees. Despite the unpredictable nature of the market, the researchers also found — based on this study and earlier efforts — that employees who profited handsomely from exercising their stock options appear to give a lot of the credit to the positive attributes of the company. The reason why it is sensible to think that employees would attribute at least some of the value of the profit from options as coming from the employer is precisely because that is how employers represent it. They go to considerable lengths to persuade shareholders that improvements in share prices are attributable to the actions of the firm. It is also interesting to note these gift exchange effects exist, or perhaps vary, across other aspects of job performance, such as cooperative behaviors or good citizen behavior that is harder to observe.
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Having regard to above perspective on September 10,2014 , news paper carried a report that In a move that is the first of its kind in the public sector banking space, State Bank of India plans to roll out an employee stock option scheme (ESOS) for its 2.19 lakh employees.
State Bank of India (SBI) Chairperson Arundhati Bhattacharya, day, said that the bank d that it would be linked to certain performance parameters. “If you perform as per the target given to you, then you will get a certain number of options, which will be locked in for a period of time, say one year. And then subsequent to that one year, you will exercise the option if you find the value has gone up. If it hasn’t gone up, you can allow it to lapse,” she said, adding, “If it hasn’t gone up that means you have not worked hard enough for the company. So, to make it go up, you have to work hard.”
The Finance Ministry is agreeable “in-principle”. “We have to take permissions from others, including the RBI. The way it will be done will have to be advised to the ministry and final approval got,” she said .
“My intention is to make it available to all. I think we all need to work as one team. Therefore, it would be nice if we can give it to everybody. But we have to find out performance parameters for every job. That is a big job. So, we are looking at how that can be done,” said Ms. Bhattacharya.
“We will try to roll it out as quickly as possible. In principle, the ministry is agreeable. And, we have to take permissions from others, including RBI, as well,” she added.
Earlier, the bank was planning to issue Employees Stock Purchase Scheme (ESPS)*, which is a share purchase scheme. “At that point, SBI’s shares were at a very low price, and it would have made sense. Since then, prices have improved, and it is difficult for our employees to purchase this,’’ she said.
*A company-run program in which participating employees can purchase company shares at a discounted price. Employees contribute to the plan through payroll deductions, which build up between the offering date and the purchase date. At the purchase date, the company uses the accumulated funds to purchase shares in the company on behalf of the participating employees. The amount of the discount depends on the specific plan but can be as much as 15% lower than the market price.
Accordingly we suggest that having regard the precarious position our bank is into , with view to resurrect our image of 1997 as the best public sector bank as tool of motivation I suggest that our bank in tune with our trend setters image explore the possibility of introducing ESOP or ESSP scheme to employees . With arrears disbursed under 10 bipartite I am sure many employees may opt for ESSP as our stock value is today low and offloading through IPO is not advisable today.
However as a superior concept I would suggest introduction ESOP which will augment motivation and growth in the long term and o promote the habit of thrift and channelise savings of the employees to secure for them a reasonable return on such savings and above all give the employees a sense of involvement in, and identification with, the work carried on by the bank so as to achieve in a greater measure a higher mutuality of interest among the employees, in a common endeavour to increase productivity.
To ensure optimum participation and popularity among employees Bank may extend loans to employees at concessional rate of interest to buy our bank shares.
Awaiting your feedback and response to this anabolic suggestion of mine.
Please consider my pragmatic suggestion and arrive at modalities after discussions with the union and officer association. I confess I have no expertise of stock market and I possess only shares of IOB only which was allotted to me during IPO1&IPO2 launched by the bank.
Assuring of my cooperation and support at all times
Retired bank unionist & Former Director of IOB