Esops turn into losing option as shares dip ' underwater '


Employee Stock Option Plans (Esops) were currency till a short while ago; they were also seen as signs of the Indian corporate sector accepting global compensation practices. With the high profile IT sector in a downturn, what happens to the options which have gone underwater?

Underwater options are those which are now below the market price. When an option is granted, the employee pays an exercise price; with a lower market price, he winds up paying a higher exercise price. Which makes the option a less attractive proposition. Globally, the practice is that when an option goes underwater, it is corrected through a re-pricing of the option. This is yet to catch on in India, reducing the appeal of stock options as a tool. In a recent, country-wide survey of 15 companies from the IT and other sectors, ESOP Direct, part of KP ESOP Consulting, a Pune based consultancy, found that 73 percent of the options granted are under water. This survey is a follow up of its earlier survey, in May, of the downside of the ESOP story.

Of the 15 companies surveyed, 80 percent were listed, providing an easily available market value, While 73.3 percent of those surveyed were from the IT sector. The 26.6 percent non-IT sector was largely represented by services.

The global practice of re-pricing options has a further refinement, which is to selectively reprice the option, relating it directly to the individual's level of responsibility. Thus, if a senior member of the team is responsible for the poor performance, why not make him (or her) pay more.

This is not the case in India, where "companies design a plan and continue to implement it, irrespective of the changes in business environment. We are yet to see Indian companies devise separate plans, different structures,' H Ghate, managing director, ESOP Direct, said "It is not seen as a flexible tool, and there is an outright rejection of selective re-pricing," he said.

He added, "Barring a few exceptions, no company has used this compensation tool as seriously and effectively as several companies worldwide have done." Analyzing some of the reasons for this lack of change, Mr.Ghate said their survey showed that 80 percent of the companies whose options are underwater believe this is a temporary situation and there is no need to act now. The cyclical upswing will automatically take care of loss in value. Only 13 percent of companies in the survey believe the options have gone underwater as a result of under-performance by the company or employees.

Mr.Ghate said they sent questionnaires to about 55 companies of which 15 responded. One reason for the low response could be that the grant of Esops is considered confidential information and companies do not want to share such information, he suggested. "Esops as a topic are perceived as a hush-hush affair, more so when one is talking about a situation where they have gone underwater'" he said.

The survey highlights that while companies tell employees that they gain with an increase in the company's valuations and that options are not a quick way to make money, very few talk about the associated risks and the downside, where employees could lose money.

A sizeable 53 percent of the respondents were not aware of the alternative methods available for re-pricing and 67 percent, of the implications of US GAAP provisions. A heartening 55 percent whose options are underwater propose to address the issue, while 50 percent said they will do so in the next three months. The balance did not have a specified time frame. A hefty 30,000 people in the 15 respondent companies have options which have gone underwater, forming a significant proportion of the total Esop coverage in the country.

- Gouri Agtey Athale

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