17  Employee Stock Ownership Plans (ESOPs)

17.1 Enterprise Incentive Plans

Enterprise incentive plans reward employees based on overall company performance, aligning their interests with business success.

17.1.1 1. Profit-Sharing Plans

Employees receive a share of the company’s profits based on a predefined formula.
- Types:
- Deferred Profit Sharing – Contributions are placed into retirement accounts.
- Cash Profit Sharing – Employees receive direct cash payouts.
- Example: A company allocates 5% of net profits to employees as an annual bonus.

17.1.2 2. Stock Options

Employees get the right to buy company shares at a predetermined price, often lower than the market rate.
- Example: An employee can buy shares at $50 each, while the market price is $80.
- Benefits: Encourages long-term commitment and aligns employees with shareholder interests.

17.1.3 3. Employee Stock Ownership Plans (ESOPs)

A company contributes stock to an employee trust fund, making employees part-owners of the business.
- Example: A firm sets up an ESOP where employees receive company shares based on tenure.
- Benefits: Enhances loyalty, motivation, and retirement security.

17.2 Executive Compensation

Executive compensation refers to the financial and non-financial rewards given to top-level executives (CEOs, CFOs, COOs, etc.) to attract, retain, and motivate them. ### Elements of Executive Compensation
1. Base Salary – Fixed annual salary based on job responsibilities and industry standards.
2. Bonuses – Short-term incentives linked to individual or company performance.
3. Stock-Based Compensation – Includes stock options, restricted stock units (RSUs), and performance shares to align executives’ interests with shareholders.
4. Long-Term Incentives (LTIs) – Performance-linked rewards paid over several years to encourage long-term decision-making.
5. Perquisites (Perks) – Benefits such as company cars, private jets, club memberships, and housing allowances.
6. Retirement Benefits – Pension plans, deferred compensation, and executive retirement arrangements.
7. Severance & Golden Parachutes – Compensation packages provided when an executive leaves, often to prevent hostile takeovers.

17.3 Management of Executive Compensation

  1. Compensation Committees – Boards establish committees to design fair and competitive executive pay structures.
  2. Performance-Based Pay – Linking pay to financial and non-financial goals like profitability and sustainability.
  3. Regulatory Compliance – Adhering to legal frameworks such as SEBI (India), SEC (U.S.), and corporate governance codes.
  4. Market Benchmarking – Comparing compensation with industry standards using executive pay surveys.
  5. Transparency & Disclosure – Public companies disclose executive pay details in annual reports.