EMPLOYEE STOCK OPTION PLAN

HUMAN RESOURCE MANAGEMENT

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 Performanc

e

Enhance Retention

Attract Talent

Reward Loyalty

Objective Of ESOP

Sense of belonging and

ownership amongst the employees

Retirement plan

Motivates the

employees

Improve sharehol

ders' value

Wealth

creation for

employe

e

Whom to give ?

Senior

Middle

Junior

50-70%

30-50%

0-20%

ESOP Allocation

Management Structure

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

HR creates option plan

Employee accepts option

plan

Employee exercises options

HR approves exercise

transaction

HR collects payment

Shares are issued into the

employees account

Vesting period

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).

Pricing Scope of Stock Option Plans

Lock-in period,

vesting and exercise of

options

Non transferability

of stock options

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.

Employee Stock Ownership Plan (ESOP) is an employee benefit plan. The scheme provides employees the ownership of stocks in the company. It is one of the profit sharing plans. Employers have the benefit to use the ESOPs as a tool to fetch loans from a financial institute. It also provides for tax benefits to the employers.

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