ESOPs: Back in Fashion
hen BPO pioneer Raman Roy was setting up Spectramind in 2000-2001, its human resources head S. Varadarajan offered share ownership to 500 staff members. “We wanted to share wealth with people who helped create the company,” Varadarajan says. When Wipro bought out Spectramind, everyone made the equivalent of at least a year’s salary on their ESOP plans. Even better, turnover among the top managers was zero. Now, at Quattro BPO Solutions, another start-up from Roy, Varadarajan heads human resources and is replicating the ESOP experiment, covering employees from the supervisor level.
Believers like Varadarajan are growing but the pool of companies using ESOPs in India remains limited. The wealth creation potential of ESOPs has not been fully exploited in India. The trend is yet to catch on with a large number of firms. There are many who are sceptical. During the best of times, amid war for talent, nothing could guarantee stickiness of executives, not even ESOPs. “There was always somebody who was willing to better the deal — offer a bigger package and lure away executives,” says Prabir Jha, HR head, Dr. Reddy’s Labs.
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Image: Abhijeet Kini
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A SLICE OF THE PIE: "Why, then the world is my oyster, which I with sword will open."- William Shakespeare, Merry Wives of Windsor | |
The Indian ESOP is unique in how it is implemented. It’s used as a carrot, dangled in front of employees so they don’t quit. It’s a long-term incentive but employees don’t seem to get the point. ESOPs “are not considered part of compensation in many Indian organizations and are not communicated as such” says Padmaja Alaganandan, India business leader (human capital), Mercer Consulting.
This is unlike in the West, where it forms a substantial chunk of a senior executive’s total compensation. In the US, ESOPs are used to push productivity, link reward to performance and align the interests of the shareholders and executives. In India, where ESOP adoption is still in its early stage, companies use stock options to attract and retain employees.
And ESOPs’ appeal depends on the stock market. Until 2007, when the going was good, ESOPs were a very attractive incentive to lure potential employees. Globally, start-ups have used ESOPs to recruit key executives, reward and share the risk with them.
Bajaj Electricals, for instance, hired staff from other sectors for as little as a 10 percent jump in salary (when 50-100 percent increases were normal), by using attractive ESOP offers, says executive director R. Ramakrishnan. Private banks like Axis Bank, with no global tag and not-so-deep pockets, used ESOPs to compete for talent against multinational giants. From unlisted, family-managed entities like Murugappa group to old-fashioned manufacturing firms like Larsen & Toubro, companies have used them to gain shine in the job market.
Then, the slowdown hit and Indian entrepreneurs were hit hard. Earlier, India’s hot job market and economic boom meant ESOPs got marketed as the biggest and quickest way to riches. This mis-selling made everyone look only at the upside and forget the downsides. “Excitement around ESOPs has waned. Unpredictable stock market has taken the sheen off,” says Sanjiv Sachar, speaking about the immediate aftermath. He is partner, Egon Zehnder International, a leading executive search firm.
Compensation experts say India’s demography too has had an impact. Across the hierarchy of positions, people are spending less time with one job. “Everyone prefers more cash in hand than something that’s long-term and uncertain,” says Shekhar Purohit, Asia-Pacific head compensation & corporate governance, Hewitt Associates.
Now that economic recovery has begun, experts believe corporate India will see a mature ESOP. Those who do vouch for ESOPs say there is no one formula that fits everyone at all times. An ESOP plan must be fine-tuned in sync with a company’s growth cycles to be effective.
Telecom major Bharti group began its ESOP journey in 2001. In its pre-IPO stage, it covered the top 100-125 executives. In 2005, it launched the second stage where everybody was covered and ESOPs were linked to the employee’s loyalty and performance.
On a sharp growth trajectory at that time, Bharti wanted to reward and incentivise its staff. In 2006, it offered performance share plan to senior executives pegging the allotment to different kinds of performance — individual, stock price and competition. By 2008, it figured that its 2005 wide-base ESOP strategy wasn’t working as the younger staff preferred deferred bonus plan or cash. Hence, now the company has restricted the plan to the middle management and above. ESOPs work “when a company constantly does course correction and customisation to be more current and better aligned,” says Inder Walia, group director for HR at Bharti Enterprises.
Now is the time to build the foundation for the next wave of ESOP adoption in the country. Here are five major trends that may shape the future of ESOPs:
New Products, New Segments
From a plain vanilla ESOP plan, companies are now willing to experiment with variants of ESOPs to suit their needs better. These range from phantom options to restricted stock units (RSUs), stock appreciation rights (SARs) to performance share plans. Companies like Wipro are looking at alternative means like deep-discounted restricted stock units to make options attractive. L&T offered SARs to avoid equity dilution and yet offer its staff the upsides of the stock movement. Companies like Infosys are going one step ahead, giving ESOPs to independent directors and driving board level involvement.
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