COMPENSATION

MANAGEMENT
XIME,BANGALORE
D T DEVARE

EMPLOYEES STOCK OPTION

What is an ESOP?
PLAN
ESOP gives an employee a right
to buy shares at a particular price
This right has to be exercised in
future within defined periods of
time.
It is expected that during this
period

The employee will add value to the

company and
Get a share of thevalue added

EMPLOYEES STOCK OPTION

PLAN
Stock Options in US
Began in Intel in 1960
Apple (1970)
Silicon Graphics (1980)
Netscape (1990)
Primarily started in technology
companies and caught up with
others like Morgan Stanley,
Merrill Lynch etc

WHY ESOPs
Provides a strong incentive to create
wealth
ESOP enables employees to share in
the wealth they create
A cost effective scheme in which
employee cost is partly borne by the
Stock Market
Increases commitment of employees
Prevents brain drain
Enables Indian companies build global
brands

IMPORTANT TERMS ABOUT ESOPs

Grant
Covering an employee under the ESOP

scheme. The grant shall specify the

number of options given, the time of
vesting, etc.
Option
An option is a right but not an obligation
granted to an employee
to apply for
and be allotted
shares of the company at a pre-fixed
price
within a specific period of time

ESOPs
Vesting
Vesting means
the process by which the employee gets
the right
to apply for the shares
under the options granted to him.
Till the vesting takes place, the employee
does not have a right to apply for the
shares.
If an employee resigns or his employment
is terminated for any reasons, all unvested
options shall expire as on that date
but the employee would retain all the
vested options.

IMPORTANT TERMS ABOUT

ESOPs

Vesting period
1. Vesting period means

the period on completion of

which the vesting of the options
of the employee takes place.
Vesting can take place in one
stroke or in a staggered manner.
For example, 300 options may
vest in an employee at the end
of three years OR
100 options each will vest in him
at an interval of 1 year. Thus
300 shares will vest in 3 years

ESOPs
Exercise means
Converting the options into shares
on payment of the specified price.
Exercise period means
the time period after vesting
within which the employee should exercise
his right
by payment of the specified price
If an employees does not exercise his right
within the period, options lapse.
The employee may exercise all the options
vested in him in one stroke

or in parts within the exercise period.

OPERATION OF EMPLOYEE STOCK

OPTION PLANS
Scope of Stock Option Plans
If anemployee is a promoter or a part of the
promoter group, he will not be eligible for ESOPs
A director who directly or indirectly holds more
than 10% of the equity shares of the company
shall not be eligible for ESOPs
Shareholder Approval
ESOPs have to be approved by the shareholders
by a special resolution. The resolution shall
contain all terms and conditions of the Plan
Pricing
The companies will have the freedom to fix the
exercise price at any level provided they
conform to the accounting policies

OPERATION OF EMPLOYEE STOCK

OPTION PLANS

Norms about time periods:

There should be a minimum period of one

year between the grant of options and
vesting.
There should be a maximum period of
eight years between the grant of options
and vesting.
Options must be exercised within a
maximum period of five years from the
date of vesting.
Shares issued in exercise of options shall
not be subject to any lock-in period.

OPERATION OF EMPLOYEE STOCK

OPTION PLANS

Non transferability of stock options

Options shall not be transferable, and
only the employee shall be entitled to
exercise the options.

Is ESOP Employee Compensation?

The accounting value of the options
shall be treatedas another form of
employee compensation in the
financial statements of the company.

OPERATION OF EMPLOYEE STOCK

OPTION PLANS
Compensation Committee of the Board

The Scheme would be administered by

a Compensation Committee of the
Board of Directors.
The Compensation Committee shall
consist of a majority of independent
directors.
The Compensation Committee decides
the quantum of options to be
granted to employees as a whole
and to any single employee

ESOP- PRACTICES OF INDIAN

COMPANIES

1.INFOSYS

ORIGINAL 1994 PLAN

Shares allotted to employees on the
basis of
i.Confirmation in service
ii.Level/Status
iii.Performance
iv.Potential
Creation of Employee Welfare Trust
Price of option/warrant = Re. 1
payable to the Trust
Vesting period = 12 months

ESOP- PRACTICES OF INDIAN

COMPANIES
Exercise period 12 to 60 months

thereafter
Exercise price Rs.100/- per warrant to
get 1 share of Rs.10
Lock-in-period For 5 years, the shares
could not be sold
98 PLANExercise price100% of the fair
market value
99 PLAN Exercise price not less than
fair market value
2002 PLAN- Exercise price not less
than fair market value

ESOP- PRACTICES OF INDIAN

COMPANIES
Fair market value: Closing price of
companys shares in the stock
exchange
Where there is the highest trading
volume on a given date
If the shares are not traded on that
day, then the closing price on the next
trading day

ESOP-PRACTICES OF MNCs IN
INDIA
Almost all MNCs in the IT sector have ESOPs
They cover a large % of their employees
Allotment is based onGlobal financial
performance of the company,Performance,
Position, Criticality of employees
Allotment decisions are generally made by
parent company
Used very aggressively to attract talent
some years ago
Due to low market prices, the ESOPs in
MNCs are not very attractive right now
Despite the current problems with ESOPs,
MNCs regard them as an important
component of their Compensation strategy.

ESOPs THE NEGATIVES

No guarantee of return
Shareholders dislike when the
stock under-performs the index
Promoters can suffer dilutions
Taxation is an issue

ESOPs DURING
DOWNTURN
Contrary to the popular belief,
the most appropriate time to
grant ESOPs is when the
markets have hit the bottom
The option holders get shares at
lowest possible price, with no
downside risk and higher
potential upside.
Not all companies are however
enthusiastic about this

ESOPs CURRENT VIEW

A survey in Bangalore conducted by
a well-known Indian Compensation
Consulting Company:

50% of the respondents did not view

ESOPs favorably

They felt that ESOPs may be ok at

higher levels but not at lower levels

ESOPs A COMPONENT OF
COMPENSATION

ESOP scheme can get very

complicated

Legal and accounting aspects may

get undue importance.
HR professionals need to
emphasize that ESOPs are a
powerful tool to attract, motivate
and retain employees.