HUMAN RESOURCE MANAGEMENTEMPLOYEE STOCK OPTION PLAN
Increasing Popularity Of ESOP Determining innovative retention program ESOP is one of the most popular employee retention and motivation program In a poll conducted by Business world in India 63% companies have confirmed having an ESOP program or planning to have one in next 12 months
Employee Stock Option Plan Employee Stock Option Plan (ESOP) is a plan through which a company grants an option to its employees to acquire shares at a future date and at a predetermined price .
Objective Of ESOP Reward EnhancePerformance Retention Attract Reward Talent Loyalty
Objective Of ESOP Improve shareholders value Motivates the employees Retirement plan Sense of belonging and ownership Wealth amongst thecreation for employees employee
Whom to give ?Management Senior 50-70%Structure Middle 30-50% ESOP Allocation Junior 0-20%
Incentive Mechanism • Employee Stock Option Plan(ESOP) • Employee Stock Purchase Plan (ESPP) • Share Appreciation Rights (SAR)
Employee Stock Option Plan A stock option is the opportunity, given by employer, to own a certain number of shares of your companys common stock at a pre-established price, known as the grant price, over a specific period of time, known as the vesting period.
Terms used in an ESOP Grant Date Option Price Vesting Date Exercise Period
Example Shenoy Solutions, an IT company. Has 100,000 shares currently priced at Rs. 10 The company offers an employee Girish on 1st November 2008 (Grant Date ) , option of 1000 shares at Rs. 10 (Option price), after two years (Vesting period). After two years i.e 2010, the price of the share is Rs. 40, and Girish exercises the option(Exercise Period) he pays Rs. 10,000 and the company issues 1000 shares.
Work Flow Of ESOP Vesting period EmployeeHR creates option Employee accepts exercises plan option plan options Shares are HR approves HR collects issued into the exercise payment employees transaction account
Salient Features Of ESOPs Employees can acquire shares at a pre-determined price Exercise of option plan is subject to vesting period --- Minimum period of one year between grant and vesting as per SEBI Guidelines Right to dispose of shares subject to lock-in-period as may be determined by the company
Rules and Regulations By Companies Act-Issue of stock options requires approval of shareholders by way of a special resolution as per section 81(1 a).
EMPLOYEE STOCK PURCHASE PLAN Employees are given the right to acquire shares of the company immediately , not at a future date as in ESOP ,at a price lower than the prevailing market price . Shares issued are subject to lock-in period , as a result the employee cannot sell the shares and or the employee has to continue with the employer for a certain number of years.
Salient Features of ESPPCompanies issue shares to employees Price could be at a discounted rate or at market rate Lock-in period of one year for listed companies as per SEBI (ESOP) guidelines - No lock-in where ESPP is part of public issue and -Shares are issued at same price as in public issue Free transferability after lock-in period
Share Appreciation Right(SAR) Under this scheme , no share are offered or allotted to the employee . The employee is given appreciation in value of shares as an incentive or performance bonus.
Salient Features Of SAR Equity linked performance rewards Realization of appreciation without cash investment by employees Employer to pay out cash
Tax TreatmentFor employees: According to the Finance Bill 2009 - FBT on ESOPs has been abolished. ESOPs have been included in the purview of Perquisites under Section 17 (2). -Where the capital gain arises from the transfer of such shares referred to in sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause.” Incidence of tax
Tax TreatmentFor the company: As per SEBI guidelines listed companies have to account for ESOP by treating the same as an expense. As yet there is no clarity whether this expense will be allowed as deductible expense by the Income Tax authorities.
Infosys Infosys- pioneered the concept of ESOP in India in 1994 Infosys has rewarded - plumbers, peons, electricians drivers with Infosys stock. Narayana Murthy’s Chauffeur Kannan is a millionaire -His portfolio is worth 20 million rupees Sixty-seven others drivers are among 2000 Infosys millionaires.
BPO BPO pioneer- Raman Roy was setting up Spectramind in 2000-2001 when they offered shares to 500 staff members. Their idea was to share wealth with people who helped them start the company. The turnover among the top managers was zero. But when Wipro bought out Spectramind -Everyone made the equivalent of at least a year’s salary on their ESOP plans.
Bharti Telecom major Bharti group began its ESOP journey in 2001. In 2005 - Everybody was covered and ESOPs were linked to the employee’s loyalty and performance. In 2006, it offered performance share plan to senior executives . But by 2008 – They realized 2005 wide-base ESOP strategy wasn’t working as the younger staff preferred deferred bonus plan or cash. Now the company has restricted the plan to the middle management and above.
Axis Bank The management decided to pass on the FBT burden to employees, taking advantage of a clause in the tax laws. April 2001 - More than one million options were exercised April 2004 - More than three million options were exercised The amount of wealth created had exceeded Rs. 100 crore in April 2004 .
Axis Bank April 2005 - Saw a fall in compare to first four years of the plan April 2007 - Less than 3 lakhs options were exercised The amount of wealth created came down to Rs. 10 crore Apri l 2008 saw a big shift in Axis Bank’s ESOP strategy They narrowed the scope of the plan to only employees in the middle management and above
Few more … Bajaj Electricals hired staff from other sectors for as little as a 10 percent jump in salary (when 50-100 percent increases were normal), by using attractive ESOP offers.
Conclusion The wealth creation potential of ESOPs has not been fully explored in India. ESOPs are not considered part of compensation in many Indian organizations . ESOP will be used to retain the talented workforce. It is an advantage for both employee and company .