Human Resource Management: Employee Stock Option Plan

HUMAN RESOURCE
MANAGEMENT
EMPLOYEE STOCK OPTION

PLAN
Increasing Popularity Of ESOP
 Determining innovative retention program
 ESOP is one of the most popular employee retention and

motivation program
 In a poll conducted by Business world in India

63% companies have confirmed having an ESOP program
or planning to have one in next 12 months
Employee Stock Option Plan
 Employee Stock Option Plan (ESOP)

is a plan through which a company grants an option to its
employees to acquire shares at a future date and at a
predetermined price .
Objective Of ESOP
Reward Enhance
Performance Retention
Attract Reward
Talent Loyalty
Objective Of ESOP
Improve
shareholders'
value
Motivates the
employees
Retirement
plan
Sense of belonging
and ownership
Wealth amongst the
creation for employees
employee
Whom to give ?
Management
Senior 50-70%
Structure
Middle 30-50%
ESOP
Allocation
Junior 0-20%
Incentive Mechanism
• Employee Stock Option Plan(ESOP)
• Employee Stock Purchase Plan (ESPP)
• Share Appreciation Rights (SAR)

Employee Stock Option Plan
 A stock option is the opportunity, given by

employer, to own a certain number of shares of
your company's common stock at a pre-established
price, known as the grant price, over a specific
period of time, known as the vesting period.
Terms used in an ESOP
 Grant Date
 Option Price
 Vesting Date
 Exercise Period
Example
 Shenoy Solutions, an IT company.
 Has 100,000 shares currently priced at Rs. 10
 The company offers an employee Girish on

1st November 2008 (Grant Date ) , option of 1000 shares at
Rs. 10 (Option price), after two years (Vesting period).
 After two years i.e 2010, the price of the share is Rs. 40,
and Girish exercises the option(Exercise Period) he pays
Rs. 10,000 and the company issues 1000 shares.
Work Flow Of ESOP
Vesting
period Employee
HR creates option Employee accepts
exercises
plan option plan
options
Shares are
HR approves
HR collects issued into the
exercise
payment employees
transaction
account
Salient Features Of ESOPs
 Employees can acquire shares at a pre-determined price
 Exercise of option plan is subject to vesting period

--- Minimum period of one year between grant and
vesting as per SEBI Guidelines
 Right to dispose of shares subject to lock-in-period as may

be determined by the company
Rules and Regulations
 By Companies Act-Issue of stock options requires approval

of shareholders by way of a special resolution as per section
81(1 a).
EMPLOYEE STOCK PURCHASE PLAN
 Employees are given the right to acquire shares of the

company immediately , not at a future date as in ESOP ,at a
price lower than the prevailing market price .
 Shares issued are subject to lock-in period , as a result the

employee cannot sell the shares and or the employee has to
continue with the employer for a certain number of years.
Salient Features of ESPP
Companies issue shares to employees
 Price could be at a discounted rate or at market rate
 Lock-in period of one year for listed companies as per SEBI

(ESOP) guidelines
- No lock-in where ESPP is part of public issue and
-Shares are issued at same price as in public issue
 Free transferability after lock-in period

Share Appreciation Right(SAR)
 Under this scheme , no share are offered or allotted to the

employee .
 The employee is given appreciation in value of shares as

an incentive or performance bonus.
Salient Features Of SAR
 Equity linked performance rewards
 Realization of appreciation without cash investment by

employees
 Employer to pay out cash

Tax Treatment
For employees:
 According to the Finance Bill 2009 - FBT on ESOPs has
been abolished.
 ESOPs have been included in the purview of Perquisites

under Section 17 (2).
-Where the capital gain arises from the transfer of such
shares referred to in sub-clause (vi) of clause (2) of section
17, the cost of acquisition of such security or shares shall be
the fair market value which has been taken into account for
the purposes of the said sub-clause.”
 Incidence of tax
Tax Treatment
For the company:
 As per SEBI guidelines listed companies have to

account for ESOP by treating the same as an
expense.
 As yet there is no clarity whether this expense will be
allowed as deductible expense by the Income Tax
authorities.
Infosys
 Infosys- pioneered the concept of ESOP in India in 1994
 Infosys has rewarded - plumbers, peons, electricians

drivers with Infosys stock.
 Narayana Murthy’s Chauffeur Kannan is a millionaire

-His portfolio is worth 20 million rupees
 Sixty-seven others drivers are among 2000 Infosys

millionaires.
BPO
 BPO pioneer- Raman Roy was setting up Spectramind in

2000-2001 when they offered shares to 500 staff members.
 Their idea was to share wealth with people who helped

them start the company.
 The turnover among the top managers was zero.
 But when Wipro bought out Spectramind

-Everyone made the equivalent of at least a year’s salary on
their ESOP plans.
Bharti
 Telecom major Bharti group began its ESOP journey in 2001.
 In 2005 - Everybody was covered and ESOPs were linked to the

employee’s loyalty and performance.
 In 2006, it offered performance share plan to senior executives .
 But by 2008 – They realized 2005 wide-base ESOP strategy

wasn’t working as the younger staff preferred deferred bonus
plan or cash.
 Now the company has restricted the plan to the middle

management and above.
Axis Bank
 The management decided to pass on the FBT burden to

employees, taking advantage of a clause in the tax laws.
 April 2001 - More than one million options were

exercised
 April 2004 - More than three million options were

exercised
 The amount of wealth created had exceeded Rs. 100 crore in

April 2004 .
Axis Bank
 April 2005 - Saw a fall in compare to first four years

of the plan
 April 2007 - Less than 3 lakhs options were exercised
 The amount of wealth created came down to Rs. 10 crore
 Apri l 2008 saw a big shift in Axis Bank’s ESOP strategy
 They narrowed the scope of the plan to only employees in

the middle management and above
Few more …
 Bajaj Electricals 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.
Conclusion
 The wealth creation potential of ESOPs has not been

fully explored in India.
 ESOPs are not considered part of compensation in

many Indian organizations .
 ESOP will be used to retain the talented workforce.
 It is an advantage for both employee and company .

THANK YOU

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HUMAN RESOURCE

EMPLOYEE STOCK OPTION

 Determining innovative retention program

 ESOP is one of the most popular employee retention and

 In a poll conducted by Business world in India

 Employee Stock Option Plan (ESOP)

• Employee Stock Option Plan(ESOP)

• Employee Stock Purchase Plan (ESPP)

• Share Appreciation Rights (SAR)

 A stock option is the opportunity, given by

 Shenoy Solutions, an IT company.

 Has 100,000 shares currently priced at Rs. 10

 The company offers an employee Girish on

 Employees can acquire shares at a pre-determined price

 Exercise of option plan is subject to vesting period

 Right to dispose of shares subject to lock-in-period as may

 By Companies Act-Issue of stock options requires approval

 Employees are given the right to acquire shares of the

 Shares issued are subject to lock-in period , as a result the

Companies issue shares to employees

 Price could be at a discounted rate or at market rate

 Lock-in period of one year for listed companies as per SEBI

 Free transferability after lock-in period

 Under this scheme , no share are offered or allotted to the

 The employee is given appreciation in value of shares as

 Equity linked performance rewards

 Realization of appreciation without cash investment by

 Employer to pay out cash

 ESOPs have been included in the purview of Perquisites

For the company:

 As per SEBI guidelines listed companies have to

 Infosys- pioneered the concept of ESOP in India in 1994

 Infosys has rewarded - plumbers, peons, electricians

 Narayana Murthy’s Chauffeur Kannan is a millionaire

 Sixty-seven others drivers are among 2000 Infosys

 BPO pioneer- Raman Roy was setting up Spectramind in

 Their idea was to share wealth with people who helped

 The turnover among the top managers was zero.

 But when Wipro bought out Spectramind

 Telecom major Bharti group began its ESOP journey in 2001.

 In 2005 - Everybody was covered and ESOPs were linked to the

 In 2006, it offered performance share plan to senior executives .

 But by 2008 – They realized 2005 wide-base ESOP strategy

 Now the company has restricted the plan to the middle

 The management decided to pass on the FBT burden to

 April 2001 - More than one million options were

 April 2004 - More than three million options were

 The amount of wealth created had exceeded Rs. 100 crore in

 April 2005 - Saw a fall in compare to first four years

 April 2007 - Less than 3 lakhs options were exercised

 The amount of wealth created came down to Rs. 10 crore

 Apri l 2008 saw a big shift in Axis Bank’s ESOP strategy

 They narrowed the scope of the plan to only employees in

 Bajaj Electricals hired staff from other sectors for as little as

 The wealth creation potential of ESOPs has not been

 ESOPs are not considered part of compensation in

 ESOP will be used to retain the talented workforce.

 It is an advantage for both employee and company .