Esops still in the hands of top rung in Corporate India
Satish John

The Economic Times [ Friday, April 6, 2012 ]


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 ownership.

"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," says Ghate.

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.

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