ESPS/ ESPP Structuring – For CEO

A listed company in Iron & Steel was going through leadership transition. The Promoter was quitting for a professional CEO.

A new professional CEO’s equity reward case is considered different from other employees. There used to be negotiations on both sides (This generally never happens in case of ESOPs for employees in general). Negotiations are natural as there is a trade-off between “high expectation” and “high stakes”.

As high stakes are involved, there could be mis-trust as well from both the sides. The challenge is, how to strike a balance in the equity comp structure so that there is no mis-trust or building-in remedy for any mischief done by either side.

Apart from bringing-in the mutual trust, it was necessary to retain the professional CEO for the committed long-term, bring skin-in the game, with factoring-in of appropriate structural mechanisms to issue the shares as per performance contract.

Given the facts and circumstances, ESPS was chosen as the best Equity instrument as it makes a person owner of shares on day one (so there is no trust issue of CEO if the company will issue shares or not in future). Shares were issued under ESPS depending upon delivery of performance. The shares were locked-in for appropriate years so as to manage non-encashment of shares for the stated period.