What is Employee Stock Option Scheme? How does ESOS Work?

In Malaysia’s highly competitive business environment, attracting and retaining skilled talent is essential for a company’s growth and long-term sustainability. Businesses are beginning to understand that retention requires more than just traditional rewards—it necessitates offering employees a meaningful stake in the company’s success.  

Equity Incentive Plans (EIPs) have emerged as a powerful tool in this regard, recognizing and rewarding employee contributions through various means, including bonuses, salary raises, and most notably, Employee Stock Option Schemes (ESOS).  

In this blog, we will explore what are Employee Stock Option Schemes (ESOS) and their benefits.

What is an Employee Stock Option Scheme (ESOS)?

An Employee Stock Option Scheme (ESOS) in Malaysia is an incentive program that grants eligible employees the right to purchase company shares at a predetermined price, typically lower than the market value. These options become available after a vesting period, which is a set duration during which employees must stay with the company before they can exercise their rights. The number of shares allocated often depends on factors like an employee's salary and years of service, ensuring alignment with company loyalty and contributions.

ESOS programs are gaining traction across businesses of all sizes as a direct method for employees to participate in their company’s growth. The scheme offers selected employees the chance to benefit financially from the company’s success, fostering a sense of ownership and long-term commitment. By granting share options over several years, companies strategically use ESOS to encourage retention, incentivizing employees to remain invested both professionally and personally in the company’s future.

Benefits of Employee Stock Option Scheme (ESOS)

1. Talent Retention and Attraction: By offering a pathway to share in the company’s future growth, ESOS helps companies attract and retain top-tier talent. Employees who see potential financial rewards through equity are more likely to stay loyal, enhancing overall retention.

2. Boosted Motivation and Engagement: ESOS directly ties employees' financial gains to the company’s success, motivating them to work towards shared objectives. Knowing their efforts impact their personal rewards drives higher engagement and productivity.

3. Profit Sharing and Alignment: ESOS grants employees a vested interest in the company’s success by offering the opportunity to purchase shares at a predetermined price. As the company grows and its stock value rises, employees share in the profits, aligning their interests with the company’s financial performance.

4. Encouragement of Long-term Commitment: ESOS typically includes a vesting period, ensuring that employees who remain with the company for the long haul are the ones who benefit. This long-term approach aligns employee objectives with company goals, fostering a deeper commitment to the company’s future success.  

5. Increased Liquidity without Dilution: For companies, ESOS provides a strategic way to raise funds as employees purchase shares. This brings in capital without resorting to external financing, allowing the company to improve cash flow while retaining control over decision-making.

Bottom Line

In conclusion, this incentive plan, widely popular in Malaysia, allows employees to participate in their company’s growth. ESOS provides employees with the opportunity to acquire company shares at a favorable price, aligning their interests with the business's success. Offering stock options helps companies attract and retain top talent, keeping them invested in the company’s future. This strategy has proven effective in creating a more engaged and dedicated workforce, contributing to both employee satisfaction and business success.