Sweat equity: Another way of rewarding your employees

Mohini VarshneyAre you keen to explore other methods of Employee Reward Tactics instead of going for ESOPs only? This article will help you evaluate what could be the best instrument suited to you for rewarding & retaining the key gems, who have given their sweat to take the organisation towards a level of success.

Gone are those days when people used to stay in a company from the beginning of their career till the pension age. Nowadays the youth is much more zealous & passionate about their growth and that is why we get to see a high attrition rate in the market. Due to this, human resource management has become an alarming issue for the corporates as well as the young business buds. The management of the newly incorporated companies or the companies opting for diversification generally believe in the practice of inducing the best executives and employees who bring in their know-how, skill and technical expertise that ultimately results in augmenting the business value of the enterprise.

Organisations are ready to go an extra mile to hold on to their performing stars. Rather than attracting employees by offering large pay-cheques, the trend is to use value enhancing mechanisms to inculcate a feeling among key professionals to undertake tasks independently as Entrepreneurs that would not only result in their own professional development but would also lead to enhancement in their personal wealth. Such value enhancing mechanisms involve sharing the ownership of the company with the employees. This is done via sharing a portion of equity of the company with the employees.

Now this can be done in three major ways namely, Preferential Allotment, ESOPs & sweat equity. In all these mechanisms equity of the company is shared with the employees. However, considering a startup, one has to evaluate the pros and cons of each mechanism in order to pick up the most suitable policy for the company as well as the employees. It has been experienced that ESOPs are increasingly being adopted by all types of organisations across the world which comes with its own set of good & bad.

Another striking option available for startups is to reward their employees who showed confidence in the idea and supported to build it from the initial level with their hard work and contribution in the form of intellectual property rights (IPR), know-how, skill and technical expertise, by issuing them shares and making them partner in the growth of the company. The shares issued to such employees (either at a discounted price or against the know-how contributed) are in legal parlance  termed as “Sweat Equity”. Sweat equity can be given to them for their value addition in the company. Also, when a company has been set-up and is working at its nascent stage, sweat equity serves as an effective tool to add potential employees who will take the company towards growth and success. Sweat equity is considered attractive by the employers & employees as it’s a short process as compared to ESOPs & preferential allotment which involve a long execution and turnaround time. The entire process of a sweat equity issue get wound up within 12 months from the date when the management decides to go for it. The employees get the shares within a short span of one year. Another plus point in this strategy is that shares can also be a pure gift from the employer to the employee for his valuable contribution in the company. This is so because only sweat equity allows shares to be allotted even free of cost. The employee is not required to spend a penny from his pocket to grab the ownership share in the company.  This acts as an effective reward to him for his hard work, entitling him to a benefit without incurring a cost.

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Mohini Varshney

Assistant Vice President|Corporate Professionals

From an employer’s view point, offering sweat equity not only serves as an effective incentive model but at the same time it ensures that its key employees don’t leave the company. This is so because shares allotted under sweat equity gets locked-in for a period of three years from allotment, thereby making the employee to continue at least form such a term and work hard in order to avail the actual benefit of the entitlement. At the same time it comes with the taxation benefits for the employer. Looking at the coverage perspective of sweat equity, this has an edge over ESOPs as it allows also the promoter as well as independent directors to be eligible which is debarred in case of ESOPs.

Drawing an inference from the above, it may be stated that sweat equity comes as a productive tool for startups in terms of cost effectiveness, taxation advantage, as an effective incentive measure, retention strategy of key employees, wider coverage of employees, less complications, minimal regulatory compliances, etc. The concept is even prevalent across the borders and hence comes with a dual advantage to incentivize  employees in India as well as overseas, which will act as a catalyst towards growth of the business in all directions.(The author is Assistant Vice President, Corporate Professionals)