| Designing on ESOP Scheme goes through three stages - Conceptualization,
Consummation and Communication. Since all these three stages have
an exponential impact on the workability of the ESOP Scheme, we call
it ' The C3 Model ' instead
of ' The 3C Model '. |
| Conceptualization |
In this phase, a broad framework of the ESOP Scheme is laid
down. This also includes defining the limitations within which the
ESOP Scheme would work. Issues crystallised at this stage would be
the maximum number of options to be granted (dilution), the maximum
vesting and exercise period, the maximum and the minimum exercise
price etc. |
| Consummation |
 In
this phase, specific number of options
to be granted per employee is worked out. These numbers are decided
considering the overall ceiling laid down in the Conceptualization
phase. It is also important at this stage to distribute the overall
ceiling into certain number of grants based upon specific circumstances
of an organisation. If not planned well, it might lead to over-granting
during the earlier periods with little left for future employees.
The legal documentation required for the Scheme (Resolutions, Scheme,
Agreement, etc.) is also drawn up at this stage. |
| Communication |
 This
is an extremely important, but unfortunately often ignored, element
in the success of an ESOP Scheme. To make an employee feel like
an " owner " , efforts should be made to provide him with
relevant financial information about the company, and also to ensure
that such information is well understood and appreciated. Employees
should be educated to view stock options as a long term instrument,
that would provide value over a horizon of 3 - 4 years. Calculation
of loss / gain on stock options by looking up the daily stock prices
should be discouraged by educating them about the future growth
prospects of the company.
A snapshot of the three phases is presented below : |
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Objective |
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Potential to create value |
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Compensation policy – Variable
pay vs ESOP |
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Coverage |
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Broad-based or selective |
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Criteria (length of service, performance, etc) |
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Employees of the subsidiary |
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Pricing – par, discount, premium or Fair
Market Value |
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Fresh issue or market purchase |
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Dilution acceptability |
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Vesting – uniform, front-ended, back-ended
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Sensitivity analysis |
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Benefit |
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Dilution |
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Accounting |
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Board and Shareholder resolutions |
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ESOP Scheme documentation |
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ESOP Agreement |
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Secretarial Manual |
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Initial |
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Grant letters |
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Notice of Option Grant |
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ESOP Manual and FAQs |
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Disclosure document as per SEBI Guidelines |
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On-going |
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Financial performance |
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Stock performance |
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Future growth trajectory |
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ESOP as a long-term instrument |
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