Startups offer ESOPs because they want to attract & retain people: Mohandas Pai

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PhonePe has allotted ESOPs worth Rs 1,500 crore to all its 2,200 employees. ESOPs not only create wealth for employees, but also include them in the organisation’s growth plan.

In an interview with Money9, TV Mohandas Pai, Chairman Manipal Global Education and former CFO & Head of Human Resources at Infosys, talks about how equity culture is growing.

Edited excerpts:

Q: Do you think ESOPs will bring greater ownership of employees at India, Inc?

Pai: I think so because for India Inc, that is a major problem on how to align the interest of employees with the corporation’s. The employees must feel wanted and they must feel rewarded. And the best way to do so is through stock options.

And if the company’s is doing well as reflected in the stock price, then the employees also get rewarded.

Second,  it’s difficult to pay people very well. Because if you pay somebody very well others also demand it. So, an ESOP-based plan becomes more acceptable.

And the third, employees also take a risk on the upside. It means if an employee gets stock option and the company does very well, he also makes a lot of money. And if the company performs poorly, the risk is shared. For all these reasons, stock option is a very good mechanism to reward and retain and attract good employees.

Q: Making employees get rich should be a universal corporate agenda, but why is it that employees get the benefit only in a few companies and that too, in a few sectors?

Pai: It depends on the philosophy of management because in India, many managements are very feudal. They don’t value people. But software and high technology companies value people. They want to share in the wealth.

And second, you need to have a currency, which is valuable. Now, if you are a listed company with low growth, your currency is not valuable.

Q: We have seen a string of ESOPs in startups.  So how effective do you think are ESOPs in retaining the talent in the country?

Pai: I think startups are giving a lot of stock options because they want to attract and retain people. And people join them expecting stock options. Everybody is doing it. A great majority is doing it, especially for high quality talent.

Q: What are some of the best practices that should be followed while offering ESOPs?

Pai: Well, some of the best practices to make sure vesting is staggered. Maybe you give a discount or a stock option to make sure that people are in the money.

So right when they join, they don’t get it at the last price, they get it at a discounted price . Because in India, many young people don’t value it. They don’t understand it so well unless the see the value. And the third is to create liquidity for the stock options.

It means that whenever people want to sell the investor stock, there should be liquidity availability for somebody else to buy. So they know that it’s real money, not just paper, money, and they can always encash it. And you’ve got to make sure that the stock options have value.