ESOPs - A Tool for Employee Retention

During the mid-1990s, corporates across the world were going through a peculiar phase - while many of them were downsizing heavily, others were struggling hard to hold on to their best employees. As employee turnover rates increased, employee retention (especially technically skilled personnel) became one of the key issues for companies and human resource (HR) officials across the world.

According to an Accenture report¹, during 1995-2000, employee turnover in the US companies increased by 20% with an annual average rate of 16.5%. The same trend was noticed in European companies - turnover rates increased from 10% in 1999 to 14% (on an average) by 2001.

The boom in the information technology (IT) industry in the late 1990s was in a major way responsible for this situation. In the 1990s, the job market was extremely vibrant and the demand for skilled people reached an all time high during this period. The Internet economy, which led to a spurt of dotcom companies, lured away the best talent from companies by offering huge compensation packages. As a result, companies started paying exorbitant salaries and perks to retain their existing employees. However, after a certain level, even increased salaries could not arrest the employee turnover. It was reported that companies in the Silicon Valley invested around $ 4 billion annually to retain employees and still, around 1,60,000 jobs were left unfilled.