Stock options are still the preserve of the top rung in Corporate India.
Half of 115 companies across industries gave out employee stock options (Esops)
to less than 10% of their employees, according to a survey of equity compensation
trends for 2011 by Esop Direct. Just 17% of companies gave options to more than
51% of the employees.
The survey highlights that Esops as an award for employees in India are
not broadbased, unlike in global corporations. On an average, senior management
gets 63% of the Esop allocation, of which the CEO/CXO gets nearly 27%.
"Stock options are always given to middle and senior management
staff. Instruments such as Employee Stock Purchase Plan, wherein employees save on a monthly basis to purchase shares at a
discounted price, are not yet popular in India," says Harshu Ghate, co-founder and CEO of ESOP Direct.
Esop compensations differ depending on whether the company is listed
or not. At least 68% of listed companies and 29% of unlisted companies give Esop
benefits amounting to less than one time the cost to company (CTC).
Nearly a third of listed companies in India have so far issued more than
5% of their equity as equity compensation. In the unlisted category, almost a fourth
have diluted more than 10% of equity to employees. While listed companies primarily
use Esops as a reward tool, unlisted companies use it for retention and employee
"Unlisted companies use it for retention since they can show
the potential for appreciation in value (value gets unlocked on listing)," says Ghate. In the long term, it works because,
"the only way the gain can be realised is by appreciation in the value of the shares (the market pays and not the company,"
Start-ups have been found to give out greater benefits - equaling twice
the CTC - to ensure attraction and retention.
By issuing Esops, 91% of the companies said, in the survey, their equity-based
compensation had achieved the objectives of implementing Esop plans. About 97% of
those companies were listed companies and in case of unlisted companies, nearly
19% felt objectives were not achieved. Some of the reasons for this were delay in
the company going public and lack of employee awareness.
Indian employees exercise the vested option early, with 90% doing it
within two years. In the US, employees wait longer. Ghate explains that this is
because of tax laws. "Under Indian tax laws, if an employee holds shares (of a listed
company) for more than one year, the capital gains are tax-free; in the US there
is no such advantage. In fact, in the US, more than 80% employees sell the shares
on the same day they exercise them," says Ghate.
The exercise price of the grants is mostly the current prevailing market
price, with 60% of the companies surveyed granting options at market price. Under
Indian accounting norms, companies can avoid an accounting charge if options are
granted at the market price.
Employees get a discount of 20% to 25% for listed companies and 15% to
70% for unlisted companies. In the US, 99% of companies grant options with an exercise
price equal to the fair market value on the date of the grant, the survey reported.