carrots that attracted talent, ESOPs are now well and truly dead.
However, even though it’s been a while since stock prices
fell, a survey shows that 92% of companies are yet to rethink their
My team and I work nearly 60 hours a week to finish my project in
time. The exercise saves a good Rs 2 lakh for the company and what
do I get? A five-figure salary that I would have got irrespective
of any extra work…
It was this angst that IT companies addressed when they started
offering employee stock options a few years ago. During the heady
days, when a smattering of IT job openings greeted every techie,
the system worked beautifully. Employers used ESOPs as an effective
tool not just to attract the best talent but also to cut down attrition
But after the stock market crash, most of these options have slipped
underwater. Yet, companies have not found it necessary to address
the situation. Among 28 of India’s larger IT companies surveyed,
only 23% offer ESOPs to more than 90% its employees.The number is
as high as 60% in the case of smaller companies. A significant 54%
of larger companies offer ESOPs to under 25% employees.
A report 'ESOP Design Practices 2001' based
on a survey of 40 companies across the country shows that
a whopping 92% of these companies, both IT and non-IT have
not changed their policies regarding ESOPs despite the fall
in stock prices. Of this, 55% have not addressed the situation
in case of an acquisition and 50% have not catered for rights
issues and consequent diminution in the value of stock options.
report by ESOP Direct, a subsidiary of Pune based Kirtane
Pandit ESOP Consulting, covers 12 non-IT companies and 28
IT companies. ESOP Direct is an end-to-end solutions provider.
"The survey was sought information on the trends and
practice of ESOPs," says Harshu Ghate, managing director,
ESOP Direct. Ghate admits that while ESOPs are fairly new
in India, there is data available from the US where stock
options are part of a well-accepted practice.
Ghate, "More than 95% of ESOPs in India were given as
an additional benefit apart from the salary. So the ESOP recipients
have not lost out on their salary to that extent.It is only
those who exercised their options and held on to them in anticipation
of prices going up, who would have lost out. If employees
consider ESOPs as an incentive, they should sell them off
Survey: A Snapshot
||60% of companies implemented ESOPs
in 2000 (post-SEBI guidelines)
||55% companies used services of a consultant to design
the ESOP plan
||55% of plans do not address the situation arising out
of change in control of the company
||50% of plans do not address the situation arising out
of rights issues made by the company
||92% of companies have not altered the plan in view of
the fall in stock market prices
||85% of companies do not use software to administer the
||60% of companies do not provide for any specific mechanism
for financing the exercise of stock options
||20% of companies provide for a broker assisted cashless
they hold on to them, they become investors and it means taking
all the market risks that come with an investment. There is no point
in blaming the companies and giving ESOPs a bad name. This is the
first time Indian IT professionals have witnessed the industry facing
a slump and thus the despair in prices going down."
It is true that with the current slump in the stock markets, many
of the options issued by the companies are underwater i.e. market
price is lower than the exercise price. However, the slump is a
blessing in disguise for companies as the current prices are the
lowest at which the options could be issued. Therefore if options
are issued at current market prices, there would be no accounting
charge for the company and no downside risk to the employees.
Far more important is the fact that companies who have offered ESOPs
have not paid attention to important issues like what happens when
the company gets acquired, or when (as is happening now) markets
are down and so are prices. Another situation that is not addressed
is of companies going in for a rights issue. "Change in control
through takeovers, mergers and de-mergers, are no longer stray incidences.
It is the same with companies issuing rights and bonus shares. It
appears that Indian companies leave it to the compensation committees
to decide on the impact as and when such situations arise. Over
30% high-tech companies have re-priced their options in the US,"
says Ghate. He feels that when market conditions are down, as they
currently are, ESOPs should either be re-priced or increased.
Ghate points out that companies often
create the impression that their employees will gain substantially
from their stock options. This is misleading for employees.
In fact, the whole objective of ESOPs is to integrate the
goals and fortunes of employees and shareholders.
the employees become part owners of the company, they cannot
say that they want only the up side of the ownership (appreciation
in value) and not the downside (fall in the value). Unfortunately,
ESOP benefits have been marketed in India as a sure way
of making mega bucks.
survey reveals that Indian recipients of ESOPs have not
yet realized that ESOPs are actually incentives.
GAME: 35% of companies considered 50-200 employees for ESOPs,
while 25% offered options to between 500 and 1,000 employees.
But compared to enterprises, IT companies were way ahead in
handing out the ESOP carrot to employees
of encashing them on the day of allotment, they hang on.
If they hold on, they take an investment decision, exposing
themselves to market risk. Ghate explains that in the US,
ESOPs are usually encashed the very same day.
What has also emerged in India is that there is no difference between
how IT and non-IT companies view ESOPs. While retention, rewarding
performance and facilitating employee ownership were the objectives
of the ESOP plan, the survey found no differences between sectors
or in the categories of target employees.
The survey found that 42.5% Indian companies, across the IT and
non-IT spectrum, offered ESOPs at a fair market price, 22.5% offered
these at below market prices. This compares favorably with the global
trend of 99.7% offering at equal to fair market price and 2.3% below
fair market price. "Global trends reveal that there is a segment
which offers at above fair market price but this could be attributed
to mature markets. When the markets were rising rapidly (at say
40%), companies could offer options 20% above the market price and
still stay ahead", Ghate points out.
What emerges is a strong need to inform employees about the downside
of holding stock options just as they are told about the benefits.
Options should be looked upon as an instrument that gives part ownership
of the company to the employees, as it carries responsibilities
and risks alike.
The survey on ESOPs was carried out in 40 Indian companies.
These included 28 IT companies and 12 non-IT companies across
the country. These companies were shortlisted from a base
of 150 companies who have implemented ESOPs.
40 companies were classified on the basis of—status
(listed or unlisted), sector (IT or non- IT), company size
(large or small) and year of ESOP implementation (before
or after 2000).
companies encompass all those involved in IT services, manufacturing
and products. The distinction between large and small IT
companies were on the basis of turnover and overall size
of operations. For small companies, the turnover was cut
off at Rs 200 crore. The turnover for large companies is
like Infosys Technologies, Aptech Limited, KPIT Systems,
Mahindra British Telecom, Mascot Systems, Mastek, Onward
Technologies, Onward Technologies, Persistent Systems, Rolta
India and Tata Infotech participated in the survey.
2000 CRAZE: It was in FY 2000 that IT companies went overboard
with their ESOP offerings. While 53.6% of the IT firms surveyed
issued ESOPs in 2000, a mere 17.9% walked the stock options
route in 1999
Here’s an example of a software company that has granted options
to its employees.
With its prime focus on Embedded Designs, Company X is a single
source provider of software design expertise from concept to end
product. It has clients across Europe, the United Sates and the
South-East Asian countries.
were different options granted to attract new talent at the senior
level. At 25% of the fair market value, the benefits passed on to
employees through these options were almost twice the gross annual
salary. However, in order to retain these senior employees, the
period set to vest these options was comparatively longer than the
period of the options granted to other employees. The benefits to
be passed on from the options granted to senior, middle and junior
employees, were close to a year’s gross annual salary.
company was in its start up stage and the management wanted
to use ESOPs to enhance employee performance, retain good
performers as well as attract new talent. All employees
in the company were eligible for stock options. Junior level
employees would be entitled to receive options if their
performance fell into a particular category predefined by
options were granted to them at almost 50% of the fair market
value. Senior and middle-level employees were granted different
types of options at close to 25% of the fair market value.
the 40 companies surveyed by ESOP Direct, 90% chose ESOPs
to retain valuable employees. Of these companies,a high
80% offered stock options in return for good on-job performance
As compared to other companies, this company had diluted a larger
portion of its equity base to be granted as options. It was close
to 20% of the total share capital. As an exit route the company
also provided for Intra Employee trading as one mode, where the
company would announce the floor price at regular intervals.
However, as has happened with several infotech companies as a result
of the slowdown, the company has postponed its IPO indefinitely
and is not currently listed on the stock exchanges. The name of
the company has been withheld due to its agreement on confidentiality
with ESOP Direct.
- Nanda Kasabe