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
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'"
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