Mohini Varshneya is AVP & head, ESOP Services, Corporate Professionals, the legal and financial solutions provider.

Employee stock options plans (ESOPs) are strategy wherein eligible employees are awarded equity shares at a predetermined rate that is generally lesser than the market value of such shares. ESOPs have gained recognition globally as well as in India. Starting from the IT industry, ESOPs have made way into diverse sectors. An interesting trend is that the BFSI sector is increasingly showing interest in ESOPs.

In August 2015, the government announced ESOPs for employees of public sector banks (PSBs). But implementation took time. Now, after a delay of almost two years, the finance ministry has given its nod to implement ESOPs in PSBs.

The current compensation structure of PSBs includes a fixed pay scale and different allowances. This is contrary to their private peers who consider the performance criteria while evaluating pay packages. PSBs also face talent crunch due to the difference in compensation between public and private sectors. Now, payments banks are entering the sector. As a result, PSBs are finding it difficult to retain their employees. All of this demands a review of existing structure and introduction of new methodologies that can improve employee benefits.

What PSBs need is a reward judgement on the basis of performance of employees. Those who outstand should feel motivated. Therefore, including ESOPs as part of performance-related pay of employees will serve two purposes, i.e. reduction in cash pay-outs and enhancement of employee satisfaction.

The Banks Board Bureau has suggested the government to consider ESOPs linked to a bank’s profitability, to better incentivise employees, especially top management. Since employees stand to benefit from any appreciation in stock price, ESOPs help align the interests of employees with those of shareholders. ESOPs can motivate employees to work towards strengthening the financial status of their banks so that their share value rises. This move can retain human assets and make them realise that they are not, in any manner, behind their counterparts in private banks. ESOPs can also help ensure accountability and sense of responsibility and ownership among bank executives.

It is worth noting that the hierarchy and vast coverage of PSBs makes this task seem difficult to implement. Thus, it is important to forecast the prospective benefits of ESOPs. The step can make PSB employees feel more aligned to their work and targets, and lead to increase in bank profitability.