are more than 300 Indian companies who have implemented ESOPs. Quite
a few of them have Plans that are running for more than two years,
though a much larger number of Plans have a shorter history. In
the overall ESOP process, designing a Plan and granting Options
to employees was seen to be the most important process milestone.
Very little attention and effort is allocated to efficient administration
and management of a Plan. For instance very few companies take efforts
to find out whether employees have understood the Plan, are their
queries and anxieties properly addressed, are they made aware about
possible gains and risks? From the management's perspective the
effort involved in compiling basic reports on ESOPs are much higher
than required. Most of the companies do not have suitably automated
solutions to manage data and records. If companies have structured
data available on past grants, allocations, % of vested options
exercised, etc it would facilitate their decision making. Added
to this is the recent regulatory framework that requires companies
to file periodic information with Tax authorities to gain tax advantages.
It will not be unfair to say that ESOP administration has been a
neglected function and in most of the cases it is restricted to
issuing grant letters and processing exercise applications. ESOP
administration has much more to it.
does ESOP administration involve?
options: There are several sub activities here such as preparation
of list, approvals of Board/Compensation committee, executing
Grant agreements, accounting entries, etc.
of options: Mostly vesting is a function of time and very few
Plans provide for performance-based vesting. Depending on the
Plan, options have graded vesting with a certain portion getting
vested at pre defined time intervals. The activity involved
here is of communicating with employees about the vesting event.
of options: This step has several sub activities such as receiving
exercise application from employees, processing it, receiving
payment, issue of shares, listing of shares, etc. For every
issue of shares is followed by a listing process in which several
external agencies such as Share registrars, Depository participant,
NSDL, Stock exchanges, etc are involved.
All plans provide for Exercise period within which the vested
options have to be exercised. The Options lapse beyond this
period. It is very important here to notify and caution the
employee about the likely lapse. Each lapse also triggers an
accounting entry for reversal of earlier entry.
Most of the plans provide for treatment to be given to vested
and unvested options when the employees leave the organization.
The treatment is dependent on the reason for separation like
death, retirement, resignation, termination, transfer, etc.
Many plans also provide for a different exercise periods depending
on the reason for separation. Such periods need to be tracked.
Adequate steps to cancel the unexercised options need to be
activities: During all these activities there are Management
reports to be generated, data required to be. Audited and disclosed
in the Annual accounts and submissions to Tax authorities to
be made. Communication to employees, their training and redressal
of their queries is also an on-going process. This is a very
critical activity and plays a crucial role in making or breaking
the effectiveness of the Plan. With the introduction of guidelines
for Prohibition of Insider Trading, companies now have added
responsibility of tracking and regulating the shares held by
The entire ESOP process involves several internal departments and
external agencies. Normally the internal functions involved are
the employee, HR, Finance, Secretarial and legal. The external agencies
involved are Share Registrars, Stock exchange, DPs, Bankers, Auditors
Internal and external processes
There are some processes such as grants, employee communications,
vesting, lapse, etc to be managed internally whereas some processes
like issue of shares, listing, submissions to tax authorities, disclosures,
etc require interaction with external agencies.
There are several processes that are repetitive making the entire
activity ideal for automation and outsourcing. Apart from the grant
decision, which involves deciding the quantum of options and where
senior management's inputs are critical, all the other processes
can be streamlined and defined in a process manual that can be implemented
by any professional agency. The company management needs to supervise
and wherever necessary approve/ authorize certain actions.
Apart from well known reasons why companies outsource the non core
processes, such as cost effectiveness, concentration on core processes,
etc. a major driver in case of the ESOP Administration process is
lack of in house domain knowledge on the subject. In terms of knowledge
of regulations, their applicability and interpretations and also
in terms of prevailing practices and trends, there is very little
awareness amongst the corporate executives about this subject. This
justifies handing over the process to professionals who are aware
about the issues involved, the prevailing laws and the best practices
in the field.
With ESOPs being adopted by wider spectrum of companies, more regulations
being enforced, global plans and overseas employees being covered,
ESOP is fast becoming a subject requiring specialized knowledge
Globally ESOP administration is a highly specialized professional
service with dedicated service providers.
Issues in outsourcing
Like any business process outsourcing decision, there are several
issues that need to be addressed while evaluating outsourcing of
ESOP administration. Let us look at some of the critical issues
that any management will face.
Confidentiality of data:
It is a common perception, and to a large extent justified, that
ESOP data is a very confidential piece of information and parting
with it or hosting it on an external server/computer will be risky.
It is true that since the ESOP data relates to employees and their
earnings, it is confidential and companies may not want to share
this information with an outside agency. However the same logic
can also be applied to the Payroll data, which also is very sensitive
employee information. Payroll outsourcing is a very common practice
even in India. Same is the case with accounting information. Many
companies outsource their Accounting function to professional firms,
equally large number outsource the CFO function. These agencies
also hold very sensitive financial and business information about
their client companies. They have gained the confidence of the companies
who have no discomfort is sharing information with them. The same
comfort can be developed and gained by ESOP service providers.
Will it be cost effective? What is the saving potential?
At the outset this is dependent on a host of factors. Size of the
company, number of employees covered, whether the company is listed
(whether employees can sell their shares), number of locations of
employees, frequency and quantum of options granted, the way the
process is managed internally, etc are some of the factors that
will determine the potential for saving. If the management were
keen on streamlining the process and making it more responsive to
the employee needs, outsourcing the administration process to a
professional agency would certainly be cheaper than doing it in-house.
What are the Service levels I can expect from an external
As a user of a professional service, a company should expect performance
assurances on issues such as response time to queries, timely and
accurate reporting, uptime of the application and servers hosting
the data, security and confidentiality of data, time taken for updating
and processing of data, etc. The service levels would also depend
on the extent of outsourcing. For instance if the process for listing
of shares is also outsourced, service levels for timely completion
of this process would also be included. In case the service provider
is also responsible for giving advise to employees on their taxation
of ESOP benefits then service levels relating to such advise would
also be included.
How should I go about deciding the service provider?
Firstly it is important to decide what is the extent to which the
process will be outsourced. Here laying down the complete process
flow and then deciding the functions to be outsourced will help
in crystallizing the roles and responsibilities. Clarity in role
definition will also help in drafting a good service contract and
in defining the service levels.
Choice of the technology to be used by the service provider is also
a crucial decision. Broadly the choice here is between a web based
on line service vis a vis use of an off line desktop application.
It is also important to decide whether you want the service to be
delivered in your premises (on site) or at the service provider's
premises (off site).
Along with these specific issues other usual evaluation criteria
like references, client list, track record, stability, profile of
the team handling the process, internal processes and quality checks
practiced by him, etc should also influence the decision about the
Administration of Employees Stock Plans is a very well established
service in the western countries especially in the US. More than
75% of the reasonably sized companies outsource this function to
a specialized service provider.
In terms of the choice of technology, larger number prefer the off
line model, though a significant number and especially bigger listed
companies prefer web based service giving access to employees world
wide to their ESOP data.
Most of the companies prefer outsourcing the complete process. The
service contracts are well structured to take care of service levels
and other commitments.
Most of the service providers also handle the trade transactions
of employees by proving an on line share trading service. Few of
them also provide on line Banking service and advice on investments.
Some of the well-known service providers in this filed are E * Trade,
Salomon Smith Barney, Paine Webber, Equiserve, etc.