When you go for vacation and you have taken a car on rent than you will not take that much care of that car as it is not yours however if you go for vacation in your own car then you will take extra care of that car because it’s yours. In case of employees also similar thing happens because if you are working in company for salary only than chances are you will not be bothered too much about the financial performance of the company, however, if employees hold stake in company through employee stock ownership plan than they will care about the financial performance of the company leading to them working efficiently and effectively. In order to understand more about this concept, one should look at the advantages and disadvantages of employee stock ownership plan –
Advantages of Employee Stock Ownership Plan
Increase the Motivation Level of Employees
The first and foremost advantage of employee stock ownership plan is that it results in increase in motivation level of employees because when employees have stake in the company they automatically get motivated to work hard because in their mind they know that if they work hard it will result in company having higher profits which in turn will lead to increase in stock price of the company and with the rise in stock price their stake will also rise which will lead to increase in employees wealth.
Good Return for Employees
Another advantage of employee stock ownership plan is that if the company turns out to be very successful than in the long term it gives good or even extraordinary returns to the employees which can be more than any salary or incentive. In simple words, if the company turns out to be a success story than biggest beneficiaries are those employees who have stock options in the company and it is nothing short of the jackpot as far employees are concerned.
Reduction in Employee Attrition
In today’s corporate world the biggest challenge for any human resource department of the company is to retain their employees as in many industries the employee attrition rate is worrisome but when company offers stock options to its employees than it results in a drop in attrition rate of employees as employees who have stock options are less likely to leave the company as opposed to those employees who are working only for salary.
Disadvantages of Employee Stock Ownership Plan
Dependent on Market Volatility
The biggest disadvantage of employee stock ownership plan is that it is dependent on the market volatility because if market drifts downwards than it results in erosion in the value of stock options of the employees, in simple words if employee sacrifices salary for stock options for many years and after those years he or she receive insignificant amount due to market volatility that this scheme is of no use to the employees.
Risky
If the company turns out to be successful than it is good but if the company turns to be unsuccessful which is the case with most of the startups which offer employee stock options than it can be disastrous for employees as they join these companies only due to lucrative stock options. In simple words, it is a risky bet which if turns out to be good than there is no problem but if it does not turn out to be good than it can prove to be a financial disaster for the employee who has opted for this scheme.
Dilution of Holdings and Less Pay
Another problem with this plan is that in case of promoters of the company issue extra stock options to others than it will lead to dilution of holdings of employees who have stock options and besides companies which offer stock ownership to employees pay less pay as compared to other companies. In simple words, one has to sacrifice his or her current pay for taking benefit of stock option scheme under an employee stock ownership plan.
As one can see from the above that employee stock ownership plan has advantages as well as disadvantages and that is the reason why any company thinking of giving ESOP to its employees and employees thinking of taking stock options should first carefully read the above points and then decide whether to implement as well as opt for employee stock ownership plan or not.