The Different Ways to Make ESOP work
Murugappa group
Running an ESOP scheme at a new age bank is a challenge, but imagine trying it out in an old-world industrial group managed by three generations of family members. In Chennai, the 100-year-old, $3 billion Murugappa Group with 29 companies, some of them unlisted, should have been among the last to experiment with stock options. But in 2007, the conservative group chose the ESOP way.
Group elders felt the need to attract professionals because the market dynamics for Murugappa’s key products were changing rapidly. For instance, the group had been selling bicycles as functional products for decades, but found new buyers looking at them as lifestyle products. The group had to adapt quickly.
|
|
|
Image: Abhijeet Kini
|
|
A GOOD LIFE: "Can one desire too much of a good thing?" - As you Like it | |
Also, Murugappa was scaling up in insurance and non-banking finance, where stock options were in vogue. The group decided to restrict ESOPs to 250 senior managers initially. There were discussions around how the senior managers in old economy businesses would respond. “After all, if it’s at variance with what people need, what you do doesn’t serve any purpose,” says Sridhar Ganesh, human resource director.
But the managers were happy and eager to take part in the scheme. There was another challenge to grapple with. There were unlisted companies within the group with no immediate plans to hit the capital market. Their executives also needed to be covered under a similar scheme. So, Murugappa came up with the Stock Appreciation Rights Scheme (SARS), similar to stock options but involving a cash bonus rather than shares. SARS is based on the valuation of the unlisted company, derived from profitability ratios and the price-to-earnings multiple prevailing in the stock market for the relevant industry. “If you have got stock appreciation rights, your shares won’t follow the vagaries of the stock market,” says Ganesh. The implementation of both ESOP and SARS has gone without a hitch.
However, in the interim, Murugappa faced a challenge as the stock market plunged. But, the recipients of the stock options, being senior managers, understood the markets and were not very worried. In any case, Murugappa never pitched the options as a substitute for cash. There was some impact on ESOP’s aspirational value. The group looked at options to counter this. There was no need to. The stock market bounced back.
Did you know?
One of the first major decisions by the new management (IL&FS) at Maytas was to grant ESOPs to employees to instill confidence and ensure retention
Single Page View
