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ESOP fables go sour - Views on News from Equitymaster
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  • Apr 5, 2000

    ESOP fables go sour

    Software stocks in the last one-week have fallen by nearly 30%-40% and though the fallout of this may be inexpensive stock prices for investors it could also mean de-motivated employees in software companies. Read the ESOP fable to understand this.

    In 1998 when leaders of the software industry realized that a great demand for software was coming up in the form of ERP, Y2k and Internet they had one crucial question in their heads and that was "How to hire, retain and motivate employees?" And so they approached God and God said "Give them ESOPs and offer prayers to NASDAQ, BUT...(software heads were in such a hurry that they came back to the earth without hearing God fully).

    In 1999 software companies realized that this plan of God worked as NASDAQ boomed (companies that had no profits were also valued highly) and employees became wealthy with ESOPs. The world got split into "ESOP haves" and "ESOP have-nots". It also created complexities for others who did not have ESOPs. For many, it was embarrassing to say that they earned only cash salaries. Parents were shocked to be told by their children that they wasted their lives earning salaries for 40 years (which actually parents had used to feed their ESOP wealthy children!!) and not ESOPs. The story went on and on with "this guy is worth this much" and "that driver is worth that much". Unfortunately employees forgot that they could convert their ESOPs into cash only after a few years and values at the time of encashment could be different.

    Yes, employees were motivated but in the process some of them also lost focus. Many of them bothered only about their ESOP values (they wanted portfolio trackers that updated every second) and not on the work they did. One basic tenet of good living "Focus on your actions and not on the results" was forgotten. Some of them also became greedy and borrowed money to support their rich lifestyles assuming that they will be wealthy when they sell their ESOPs later.

    Enter the new millennium and NASDAQ came out of its amnesia and asked, "Where is money?" and began to crumble under its helium supported values as it had no answer to this question.

    It now appears that employees with ESOPís are agitated, loosing sleep and are also de-motivated because of the fall in their net worth. So the wealthy software heads again went to GOD and GOD said "The last time you came here you did not hear me fully, what I wanted to say was that NASDAQ for all the valuations it gives to CHIPS, has little memory of its own and frequently goes into amnesia and forgets the basic tenets of valuation. So this time listen to me carefully. Give ESOPs, but tell the employees to focus on their work and only look at creating genuine value for their companies which gets reflected in the book value, AND....(software heads were in such a hurry that they came back to the earth without hearing God fully).



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