Widely read:
You may have heard of many companies issuing ESOPs (employee stock options) to align their employees' interests with their own. The idea is that employees would be more motivated to create shareholder value if doing so also benefits them personally. Many companies, therefore, also use this as a tool to recruit and retain top-performing talent.
How do ESOPs work?
ESOPs are essentially options that give employees the right to buy the employer's shares on a future date at a pre-specified price (exercise price). In most cases, the employees are required to wait for a specified duration (say, five years) before being able to convert these options to shares.
The case study
We conducted an analytical enquiry to find out how stocks of companies with ESOP policies have performed. Does employee motivation really translate into better stock returns? Note that we are not establishing any causation here and just trying to observe any parallels based on historical data.
To conduct this exercise, we selected the BSE 200 index as our universe. Out of the 200 companies in the index, there were 97 companies that had issued shares to their employees during FY16 to Q2 FY22 (and not ESOPs per se as making sense of that data proved to be quite tricky). To further filter out companies that do not issue shares regularly, we selected only those companies that issued shares in each of the years during the period. This left us with 41 companies. We then prepared an equal-weight portfolio of the 41 companies and compared its return with that of the Sensex.
The result
As the chart shows, the equal-weighted ESOP portfolio has outperformed the Sensex over the last 10 years. Does this mean that it's a good idea to invest in such companies as ESOPs have really translated into better stock returns?
Well, one can't be sure. This is what has happened in the past but that doesn't mean it will happen in the future also. Also, we can't be sure how much ESOPs and employee motivation themselves were responsible for the outperformance. There are many other factors/variables that determine the performance of a company and its stock.
So, while ESOP issuers are the winner, for now, the real takeaway for you is that one should never underestimate human motivation!
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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