ESOPs: Back in Fashion
Pushing Performance
In a difficult business environment where pushing employee productivity is the key to survival, companies are pegging their stock option plans to corporate and individual performance. To calculate eligibility, they are moving away from the volatile measures of the stock market and going for more predictable pointers such as business orders, profit margin, relative performance in an industry and customer satisfaction. Some sanity is returning to compensation planning too. Purohit of Hewitt Associates sees a dip in heavily used deep discounted ESOPs. Cash-starved firms are looking at supplementing salaries with options.
New Vistas for ESOPs
The recommendation of the 2nd Pay Revision Committee set up by the Department of Public Enterprises which looked at the compensation structure for the PSU staff, will have a significant impact. One of the major recommendations is the mandatory portion of Performance Related Pay (PRP) for every PSU employee and interestingly it is mandated that at least 10 to 25 percent of the PRP should be in the form of ESOPs. Many PSUs, especially those who face competition for talent from the private sector — insurance, oil and gas, telecom, etc. — wanted to implement ESOPs but were unable to do so in the absence of clear guidelines and government nod. With these recommendations in force, they are soon expected to roll out Equity Options to their employees.
Another development is the recommendation in the last Budget for the companies to have a minimum of 25 percent public holding as a pre-requisite to maintain their listing status. If the company were to approach the public every year with a 5 percent offer, it’s not only a laborious process but also costly. ESOPs provide an ideal solution. Employee holding is considered as public holding and implementing ESOPs is not costly and not time consuming (no approvals apart from Shareholders’ approval is required). ESOPs also help achieve multiple objectives such as wealth sharing with employees, and broad-based employee ownership helps synchronize interest of employees and shareholders. This will help in minimising the negative impact on share price, preferential allotment could come with some other constraints such as board representation, restriction on promoter share transfers, and other operational covenants. ESOPs would have no such constraints or impact on the company management and operations.
|
|
|
Image: Abhijeet Kini
|
|
NO PAIN NO GAIN: "Our Doubts are traitors, and make us lose the good we oft might win, by fearing to attempt:- Measure for Measure | |
Transparency and Communication
For many in India, ESOPs weren’t clearly thought out and transparent. Not many had robust performance management system. Loyalty and favouritism played a critical role in shaping ESOP plans. Especially in promoter-driven companies, decisions were quite subjective. Worse, some oversold their ESOP plans highlighting only the expected upsides. “Through the years of hyper growth, there did not seem to be any reason to warn against the downside,” says Mercer’s Alaganandan. This led to a lot of heartburn when the value of ESOPs evaporated in the markets. “Clearly, stating out the objectives and scheme parameters will hold the key,” says Mayura Arankalle, manager consulting, ESOP Direct.
Unlisted Opportunity
It’s the unlisted companies that provide the biggest upsides and can benefit the most with ESOP as a tool. While they have been offering aggressive ESOP plans to woo talent, they are also getting savvier and smarter in using them. They are adopting the boutique approach to customise ESOPs. To take one example, some firms are offering different classes of shares with different voting rights. Responsible behaviour during uncertain times is boosting confidence as well. ICICI’s insurance JV, which offered ESOPs to its staff with an eye on exit during the IPO, repurchased the shares six-eight months ago. Since the IPO got postponed due to poor market conditions, this was the company’s way of offering an exit to the employee shareholders.
Regulatory norms too have helped. Since 2007, all unlisted companies in India have to get an annual valuation certificate. For the moment, any conversation around ESOPs draws disinterest and impatience from employers and employees alike. It is understandable because many have burnt their fingers and seen their millionaire dreams crash. But this may well be the inflection point that could lay the foundation for ESOP’s next stage of growth in India.
But all this introspection, turmoil and return of some sanity could well be signals of a new beginning.
Did you know?
Pakistan seems ahead of India when it comes to implementing ESOPs in public sector entreprises. At least 7 PSUs in Pakistan — in the oil & gas, power and machine tools sector — have issued up to 12% of the equity to employees from the government’s holding.
In the recent downturn, some companies such as Jain Irrigation, India Infoline, Dish TV and Bajaj Electricals re-priced their options to maintain their attractiveness to the employees. This trend was not as widespread in India as in the US
Single Page View
