Employee Stock Ownership Plan (ESOP): Definition, Types, Mechanism, and Examples in...
These days, companies are not only providing salaries to employees but also various forms of incentives to increase loyalty and productivity. One of them is share ownership, popularly known as ESOP or Employee Stock Ownership Plan.
Large companies to startups that have already gone public use this ESOP system as a strategy to attract and retain the best employees. So, what is ESOP? What is its impact on employees and the company? Let’s take a look at the explanation below!
Definition of ESOP
ESOP or Employee Stock Ownership Plan is a company share ownership programme given to employees as a form of compensation and to appreciate high-performing employees.
In short, through this ESOP scheme, company employees have the opportunity to become owners of shares in the company where they work. The granting of shares is done gradually based on length of service, performance, and position.
In practice, ESOP can take the form of free shares, options to buy shares at a special price, or even a combination of both.
The ESOP scheme was first implemented in the United States in the 1950s. At that time, there were many terms used to refer to this ESOP, such as Employee Stock Ownership Plans (ESOPs), Employee Stock Purchase Plans, and Stock Option Plans.
Indonesia only began practising this scheme before 1998 by some non-public companies. After PSAK (Share-Based Payment) No. 53 by the Indonesian Institute of Accountants became effective in January 2017, there was an increase in public companies adopting this ESOP scheme.
PSAK No. 53 emphasises that companies must record transactions when paying employees using shares.
Unfortunately, the implementation of ESOP in Indonesia is not yet optimal because there is no specific legal instrument regulating ESOP, whether from the perspective of capital markets, taxation, or labour. This results in ESOP implementation being limited by legal boundaries that are not specifically designed to regulate ESOP.
Based on a journal article titled Market Reaction to the Announcement of Employee Stock Ownership Programme, the implementation of the ESOP scheme is only based on two main rules:
Bapepam Regulation No. IX.A.7 on the Responsibilities of Managers in Allotment in Connection with Reservations and Allotment of Securities in Public Offerings, which regulates that employees of an issuer receive priority shares of at most 10% of the public offering.
Bapepam Regulation No. IX.D.4 on Capital Increases Without Pre-emptive Rights (HMETD), which regulates that issuers may increase capital without HMETD if provided for in the articles of association, with a maximum limit of 5% of paid-up capital within 3 years. This regulation forms the basis for implementing ESOP in public companies on the IDX.
The main concept of ESOP is to align the interests between employees and shareholders. By owning shares, employees will be motivated to improve company performance because they also share in the results.
Citing a journal article titled The Influence of Employee Stock Ownership Programme (ESOP), Fixed Asset Intensity (FAI) on Financial Performance, it states that there are five objectives for companies implementing the ESOP scheme. Here are those five ESOP objectives:
To provide rewards to employees or certain parties for their contributions to improving company performance.
To align the interests of each party, thereby reducing conflicts of interest between investors or owners and management.
To foster commitment and motivation among employees in increasing company productivity.
Expected to attract, retain, and motivate employees in increasing shareholder value.
To support the success of the company’s long-term business strategy.
Citing a research journal titled The Influence of Implementing Employee Stock Option Plan (ESOP) on Financial Performance and Company Value on the Indonesia Stock Exchange, it explains that ESOP is one way to reduce differences in interests between owners and company management.
Real benefits will be obtained if employees are allowed to sell the shares they own at least after 3 years from the execution of the ESOP. The implementation of ESOP is divided into several stages: the announcement stage, the option grant stage, and the share execution stage, with an average shift time of 3 years between each stage.
The ESOP scheme is suitable for implementation by stable and profitable companies. Most companies that implement ESOP are public companies because their shares are liquid. However, private companies can also do so but require trust and independent valuation (Source).
In general, ESOP has several main forms used by companies. This is stated in the journal article titled The Influence of Employee Stock Ownership Programme (ESOP), Fixed Asset Intensity (FAI) on Financial Performance, namely:
- Direct Share Grants (Stock Grants)
The ESOP scheme is indeed carried out to “bind” employees on the grounds of giving appreciation. As a result, this programme is given only to loyal and high-performing employees. Direct share grants are also made with certain conditions.
- Employee Share Purchases (Direct Employee Stock Purchase Plans)
This type of ESOP gives employees the right to buy company shares if deemed beneficial, and payments can be made through salary deductions. Usually, there will be an upfront payment or down payment on the shares purchased.
This type of ESOP can increase company capital.
- Stock Options (Stock Option Plans)
The most common type of ESOP used by companies in Indonesia. In this type of ESOP, options are given to employees to buy company shares over a certain period of time, and pay at a price set on the date.
This type of ESOP tends to give companies the freedom to decide which employees