As per business experts, the current technological advancements are known to be one of the main reasons contributing to the fluctuating demand for human resources in the majority of industries today. However, the concept of sweat equity shares is still a common phenomenon adopted by most businesses worldwide. Now, even though it is not known to many, it is still an active practice in the business world. Before we discuss why it is important and how it helps compensate employees, let us first understand what exactly are sweat equity shares below.
The sweat equity shares come under the Companies Act 1956 along with the Companies Act 2013. The basic definition of sweat equity shares is the shares that are given to a selected number of employees and company directors on the basis of their contribution and efficiency as an employee or director of the company, for a particular project, in most cases.
- One contributing factor that determines the issuance of sweat equity shares to employees and company directors is their value addition, in terms of their contribution that led to the ownership of intellectual property rights for the business.
- The issuance of sweat equity shares is done in a medium other than cash payments, in the form of discounts or monitory considerations in their salary payments. It basically encourages direct participation of the directors or the employees in profit sharing, which is then titled as return on their investment.
- Not every company can issue sweat equity shares. The list of companies that are allowed to issue sweat equity shares includes a listed or unlisted company, a private company, a public company, a section 8 company, or a one-person company.
How Can They Be Used?
There is more than one way to use sweat equity shares to compensate for the lack of cash available within the company, resulting in demotivation and inefficiency from the employees. Not all employees have to be offered sweat equity shares, however, some of the situations that can be compensated well with the issuance of these shares include the following.
One of the major reasons why employees switch jobs is overworking for long hours, without being acknowledged and rewarded. With the help of sweat equity shares, this concern can be handled properly as this will make exceptional employees appreciated, without costing the company any penny.
In order to keep the team of employees motivated, it is important to give them timely incentives that work in their favor and makes them feel like they are an essential member of the company. Now, it is not possible to always be able to provide cash incentives to the employees to keep them motivated and dedicated to their job. However, the issuance of sweat equity shares in this situation can greatly compensate for the cash incentives, while encouraging the employees to work harder, with increased productivity.
Value Addition Rewards
In the work environment of any given company, not all employees work at the same pace, with the same dedication and focus. There is always a clear distinction between an employee that brings major additions to the table as opposed to an employee who sits in the back and enjoys the appreciation, without doing the hard work. Now, for the employees who actively participate in order to add value to the existing business, it is important to acknowledge the same to keep them in high spirits. This is where using sweat equity shares is a smart decision as you get to keep your top employees, without spending money to do the same.
Alternative To Promotion
Every once in a while, an employer is stuck at a crossroad as the employees start building pressure for promotions. However, it is a given that with each promotion, the expected cost to the company put employee who is promoted increases. Not all businesses, especially start-ups, can afford to increase their expenses, just to meet their employee demands. However, they still cannot ignore this particular need from the employees. and so choosing to issue sweat equity shares in place of promotional salary increments, can be a win-win situation for both the company as well as the employee in question.
Overall, to conclude, employees, are the backbone for any business today, same as the directors. Therefore, it is necessary to keep the employees motivated and happy throughout their journey with your company, to guarantee their efficiency and constant value additions to your business. In simple words, sweat equity shares are not a replacement for monetary rewards, but they can definitely mean more to the employees or directors as they will feel like a part of the team, instead of an outsider. The only thing to remember is that with the issuance of sweat equity shares, you might end up losing a little control over your company, given the percent of shares you hand out. So, just be careful and research well before you begin issuing sweat equity shares to your company employees and directors.