ESOPs have become an essential tool for today’s companies to motivate, retain, and align employees with long-term goals. This is why we recently hosted a webinar on The HR perspective on ESOPs (delivered in 🇷🇴) to discuss its benefits and challenges and how to leverage an ESOP to align employee interests with long-term company growth.

Our guests were Mădălina Moraru, VP of HR for EMEA at Verifone, and Nevenca Doca, Senior HR Executive Director, Banca Transilvania, moderated by Carmen Sebe, President of BoD at SeedBlink.

During the webinar, they covered:

• When to launch an ESOP: Determining the right company stage and structure for an ESOP to be most effective.
• How to increase employee motivation and retention: Exploring how ESOPs can make employees feel more invested and connected to their company’s future.
• HR challenges & common misconceptions: Recognizing and addressing potential hurdles and myths from an HR perspective.
• Eligibility & participation: Designing fair and inclusive participation rules.
• Communication strategies: Effectively rolling out an ESOP plan so employees understand and appreciate the program.

Let's dive into the main takeaways.

When is the right time for ESOP from an HR perspective?

Employee Stock Ownership Plans (ESOPs) are effective tools for employee retention and motivation, but their implementation steps or effectiveness depends heavily on the company’s growth stage.

All speakers agreed on the importance of tailoring ESOPs to the company's specific phase and needs.

Carmen:

“In Europe, ESOPs are less prevalent than in the U.S. due to a generally less entrepreneurial culture. However, this is changing, especially in the UK, France, and the Netherlands, where supportive legislation makes ESOPs valuable for employees. In countries like Germany and Austria, the legislation is less favorable, resulting in fewer implementations. In Eastern Europe, ESOPs are emerging gradually, with about 5–10% of companies offering such plans.”

During startup phases, ESOPs act as motivational instruments when cash is limited, while in more mature phases, they become valuable for retention.

Let us expand on that: For early-stage startups, ESOPs help attract senior talent by offering the company's future potential instead of immediate high compensation, making it easier to bring talent even when cash flow is limited.

For more mature companies, ESOPs serve as a mechanism to align employee efforts with the company’s long-term goals, especially during rapid growth or in preparation for an exit. Madalina shared her perspective and identified three key moments when it might be a good time to implement an ESOP.

Madalina:

“I believe there are several points when it's opportune to introduce an ESOP, but its success depends on using it in the right way. Primarily, ESOPs work well for startups in their early to mid stages, as these companies need to attract key talent. While they may not be able to offer substantial compensation at that moment, they can use ESOPs to sell the company's potential. This makes ESOPs the most common tool for attracting key positions.

The second right moment to introduce an ESOP is when a company enters a new maturity phase, particularly during rapid growth. In the current market, we see many situations where retaining key people and aligning them with growth goals becomes crucial—this is where long-term financial incentives like ESOPs are effective.

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The third scenario is for mature companies which have a well-established market presence. For such companies, especially those that are publicly listed or preparing for an exit, ESOPs help align the interests of employees with the company’s goals."

Nevenca shared with us an example from the banking industry, where Banca Transilvania used share plans as early as 1997 to retain top management, contributing to very low employee turnover rates.

Nevenca:

“In my experience at Banca Transilvania, where I've worked for 22 years, we already had a form of share plan as early as 2002-2003, even though there wasn't any ESOP legislation at the time in Romania. Shares were granted to the top and middle managers, and I remember my first encounter with this was around 2003, when my colleagues received shares for their performance. It was a differentiator for us as an employer, contributing significantly to our low staff turnover—less than 1% annually for top and middle management, consistently below half of the market average.

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While ESOPs weren’t the sole factor in this retention, they played a key role in fostering a sense of ownership and financial success for the company. In Romania, ESOPs are one of the few benefits with clear fiscal advantages, making them invaluable if used correctly."

Challenges and misconceptions of implementing an ESOP

Implementing ESOPs comes with challenges, particularly regarding misconceptions around them, their complexity, and the legal frameworks required. Employees often do not immediately understand the value of ESOPs, especially in private companies where the liquidity of shares is uncertain until an exit.

Madalina and Nevenca mentioned that successful ESOP implementation includes clearly communicating the benefits of ESOPs to employees and ensuring that they understand the long-term value, rather than focusing solely on immediate cash rewards. Trust and education are highlighted as key elements to mitigate confusion and hesitation.

Nevenca:

“If someone has experience with ESOPs, they already know what to expect, but for those who don’t, it’s important to explain what they are receiving, why it benefits them, and how it works. Without this understanding, employees may initially react with skepticism or fear, preferring cash over unfamiliar stock options. However, once a core group of early adopters begins to see the value and talk about their positive experiences, interest grows, leading others to aspire for the same benefits.”

Misconceptions like equating ESOPs with cash bonuses can undermine their effectiveness. Therefore, structured communication and the support of experienced legal and financial advisors are crucial to implementing successful ESOPs that attract and retain talent while aligning with company objectives.

Motivation vs. Retention: The dual role of ESOPs

The conversation also explored whether ESOPs are more useful for employee motivation or retention, revealing that the answer often depends on the roles and circumstances involved.

Carmen:

“Trust can only develop as employees experience and understand the program, which is a process, not an event.“

For certain senior roles, ESOPs are an expectation rather than a perk. Employees who have received shares from similar roles will likely expect ESOPs to be part of their overall compensation. Thus, ESOPs are strong motivators in attracting high-level talent, especially in the competitive startup and technology sectors.

Madalina:

“For certain senior roles, people already come with the expectation that they won't just receive a base salary and possibly a bonus or some benefits. They expect, and are often waiting for, stock options or shares, especially if they've had similar incentives in previous jobs. In markets where such practices are common, offering these kinds of incentives becomes mandatory to attract top talent.”

Madalina and Nevenca highlighted that the design of ESOPs must often balance both functions—motivating new talent while retaining existing team members.

Nevenca:

“In my experience, ESOPs are less effective for attracting talent but are very powerful for retention and motivation—though not as a stand-alone tool. For retention, ESOPs must be attractive and generous enough to make staying worthwhile. For motivation, however, they need to be part of a broader package of incentives."

However, beyond motivation, ESOPs play an important role in retaining key employees, particularly in mature companies where aligning long-term interests becomes vital.

Madalina:

“If people understand what they're getting and find it relevant enough, it becomes a powerful retention factor. But the ESOP alone isn't enough to motivate them. While ESOPs help, other factors also contribute to achieving your desired results. I wouldn't choose between retention and motivation because it depends on the situation. Ultimately, we need both to attract and retain people effectively within the organization.”

ESOP management and cross-functional collaboration

Another significant theme discussed is the complexity of administering ESOPs and the need for a cross-functional approach. ESOPs are not simple incentives but require the coordinated effort of HR, legal, financial, and sometimes tax advisors to ensure proper implementation.

Madalina:

****”A challenge we’ve faced involves the complexity of administering ESOPs across different countries, where legislation varies and continually changes.”

Different countries have varying legislative frameworks regarding stock options, which necessitates a deep understanding of local rules to make ESOPs effective and compliant. For example, the HR leaders noted that understanding tax implications is critical—failure to comply with these regulations could lead to the ESOPs being reclassified as salary-related taxable benefits, diminishing their attractiveness.

Our guests mentioned that companies often face challenges in ensuring that managers are well-prepared to communicate the benefits of ESOPs convincingly to their teams. Consequently, training managers and providing them with the right tools to explain ESOPs effectively is as important as designing the ESOP itself.

Madalina:

"We’ve learned that relying solely on managers for this communication was not effective, so we moved it up a few levels. It became clear and important for us that those who explain the benefits of ESOPs have to understand the program's value."

For more insights, watch the whole SeedBlink webinar on The HR perspective on ESOPs (delivered in Romanian):

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