GAIN­ING CUR­RENCY

Com­pa­nies of all hues, in­clud­ing old warhorses, are now bet­ting on stock op­tions to en­sure em­ployee loy­alty

Business Today - - CONTENTS - By P. B. Jayaku­mar Il­lus­tra­tions by Ni­lan­jan Das

Com­pa­nies of all hues, in­clud­ing old warhorses, are now bet­ting on stock op­tions to en­sure em­ployee loy­alty

SHYAM KU­MAR SINGH lived in a sin­gle­room ten­e­ment in Mum­bai when life took a turn that seemed to be straight out of a Bol­ly­wood script, and he struck it rich. A poor mi­grant from Ut­tar Pradesh, Singh was an of­fice boy, and the first em­ployee of CitrusPay, which be­gan op­er­a­tions in 2011.

In Septem­ber 2016, he got a wind­fall pay­ment of ` 50 lakh, when South African on­line pay­ments com­pany PayU ac­quired CitrusPay for ` 860 crore. Singh’s re­turns on his Em­ployee Stock Op­tion Plan (ESOP) were part of the ` 43 crore paid to 50 em­ploy­ees who cashed in their stock op­tion com­pen­sa­tion. At least 15 em­ploy­ees were re­warded with over ` 1 crore each.

In Jan­uary this year, Paytm sold shares to Canada-based VC firm Dis­cov­ery Cap­i­tal in a sec­ondary sale, valu­ing the firm at $10 bil­lion. That deal helped some 300 for­mer and ex­ist­ing Paytm em­ploy­ees be­come mil­lion­aires. About 20-25 peo­ple re­port­edly made over $1 mil­lion each (about ` 6-7 crore) from the deal. If the re­cently an­nounced $16 bil­lion ac­qui­si­tion of on­line re­tailer

Flip­kart by US re­tail gi­ant Wal­mart sails through, pre­sent and pre­vi­ous Flip­kart em­ploy­ees are set to ben­e­fit by at least $500 mil­lion by ex­er­cis­ing their ESOP op­tions. A year ago, Flip­kart had re­pur­chased ESOPs worth $100 mil­lion from over 3,000 pre­sent and past em­ploy­ees, in­clud­ing Myn­tra and Jabong.

The charm of ESOPs is back af­ter a lull of 3-4 years and em­ploy­ees are show­ing re­newed in­ter­est in ESOPs. If ESOPs were an op­tion for most IT firms and to some ex­tent in sec­tors like pharma, FMCG or bank­ing to re­tain key tal­ent, now ESOPs have be­come the main op­tion for com­pa­nies across sec­tors – from new gen­er­a­tion e-com­merce and tech­nol­ogy based com­pa­nies like cab ag­gre­ga­tors to in­sur­ance com­pa­nies that are strug­gling to get ad­e­quate cash liq­uid­ity in busi­ness - to at­tract tal­ent, loy­alty and re­ten­tion, say ex­perts.

“Though ex­act data on com­pa­nies and value of ESOPs on of­fer is not avail­able, our es­ti­mate is that around 700 listed and over 3,000 un­listed com­pa­nies have of­fered eq­uity-based com­pen­sa­tion in some form,” says Harshu Ghate, Co-Founder and Man­ag­ing Di­rec­tor, ESOP Di­rect, which spe­cialises in eq­uity com­pen­sa­tion ser­vices.

Par­tial or com­plete im­ple­men­ta­tion of ESOPs has been achieved by 97 per cent of 120 com­pa­nies sur­veyed by ESOP Di­rect in 2017. The sur­vey cov­ered both listed and un­listed en­ti­ties and al­most 89 per cent of these com­pa­nies said ESOPs were the best lure for tal­ent.

Re­ten­tion and re­ward con­tinue to be the top­most rea­son for grant­ing ESOPs, fol­lowed by em­ployee own­er­ship. Over­all, 62 per cent of com­pa­nies rate wealth cre­ation as a key ob­jec­tive for im­ple­ment­ing ESOP plans.

“ESOP is still one of the most at­trac­tive op­tions to re­tain tal­ent and en­sure loy­alty, es­pe­cially for com­pa­nies that are in a grow­ing phase but lack liq­uid­ity in busi­ness and can­not af­ford to of­fer com­pet­i­tive pack­ages to at­tract tal­ent across sec­tors and busi­nesses,” says Ishita Sen­gupta, Part­ner, Global Mo­bil­ity Ser­vices, Price­wa­ter­house­Coop­ers (PwC).

To­day’s man­agers are se­lec­tive. Gone are the days when ESOPs were gen­er­ously of­fered to all em­ploy­ees. About 67 per cent com­pa­nies sur­veyed by ESOP Di­rect said they granted ESOPs to less than 10 per cent of em­ploy­ees. Only 17 per cent com­pa­nies said they gave ESOPs to over half of their em­ploy­ees. And 74 per cent com­pa­nies gave ESOPs to all CXO level em­ploy­ees.

“E-com­merce com­pa­nies are still lib­eral, of­fer­ing ESOPs across lev­els, though they are now cau­tious and of­fer­ing these only for crit­i­cal func­tions such as an­a­lyt­ics, tech­nol­ogy, fi­nance”, says K Su­dar­shan, MD, EMA Part­ners, an ex­ec­u­tive search firm.

“In the last five years, our sur­vey shows a clear trend for cov­er­ing fewer em­ploy­ees. 67 per cent of com­pa­nies (2015: 61 per cent) now grant ESOPs to less than 10 per cent of their em­ploy­ees, up from 50 per cent in 2011, whereas only 24 per cent (2015: 23 per cent) of the com­pa­nies grant to more than 20 per cent of the em­ploy­ees, down from 36 per cent in 2011”, elab­o­rates ESOP Di­rect’s Harshu Ghate.

Un­til 2015, em­ployee own­er­ship, and re­ten­tion were the key driv­ers for im­ple­ment­ing ESOPs in an un­listed com­pany. Sim­i­lar to listed com­pa­nies, re­ward and re­ten­tion are the key driv­ers for im­ple­ment­ing an ESOP plan even at un­listed com­pa­nies. While com­pa­nies with 50-200 em­ploy­ees give more weigh­tage to re­ward and wealth cre­ation as ob­jec­tives for ESOPs, larger com­pa­nies (over 1,000 em­ploy­ees) of­fer ESOPs mainly for re­tain­ing and re­ward­ing well per­form­ing em­ploy­ees. Em­ploy­ees are also keen to know more

and are in­ter­ested in ESOPs these days.

The sit­u­a­tion was dif­fer­ent a few years ago, when eco­nomic slow­down was drag­ging down val­u­a­tions of un­listed firms and stock mar­kets and em­ploy­ees were scep­ti­cal to­wards for­tunes from ESOPs.

In re­cent years, ESOP plans and op­tions are again be­ing ex­plored by man­age­ments. How­ever, the plans need to be well ex­plained to em­ploy­ees by man­age­ments in a trans­par­ent man­ner with clear-cut exit op­tions, vest­ing con­di­tions and ex­er­cis­ing sched­ules , says PwC’s Ishita Sen­gupta.

ESOP Di­rect’s sur­vey shows 62 per cent of com­pa­nies have a vest­ing pe­riod of 3 to 4 years and an­nual vest­ing is the pre­ferred fre­quency opted by most of the com­pa­nies. (Vest­ing pe­riod is the time be­fore shares in an em­ployee stock op­tion plan or ben­e­fits in a re­tire­ment plan are un­con­di­tion­ally owned by an em­ployee. In most cases, if that per­son's em­ploy­ment ter­mi­nates be­fore the end of the vest­ing pe­riod, the com­pany can buy back the shares at the orig­i­nal price). Listed com­pa­nies pre­fer a shorter ex­er­cise pe­riod of up to four years, say ex­perts.

ESOPs can be of var­ied types and forms – like Em­ployee Stock Pur­chase Scheme (ESPS), Re­stricted Stocks Units (RSUs), Per­for­mance Shares, Stock Ap­pre­ci­a­tion Rights (SAR) in­clud­ing Phan­tom Stocks or ‘Shadow Stocks’. The ad­van­tage of Phan­tom Stocks, which are not real stocks, is that it can be re­deemed into cash as per the scheme, with­out af­fect­ing the com­pany’s share cap­i­tal or vot­ing per­cent­ages.

Nowa­days, em­ploy­ees are well in­formed, they know their rights, tax li­a­bil­ity and exit op­tions. Most em­ploy­ees now re­alise their ESOP val­u­a­tions are no­tional un­til the start up goes for an IPO or share sale to PE/VCs or the com­pany is re­ally per­form­ing well to lift stocks in share mar­ket.

“While the man­age­ment has a choice to de­vise an eq­uity plan best suited for the em­ploy­ees which meets its own ob­jec­tives, un­listed com­pa­nies need to com­ply with the pro­vi­sions of the Com­pa­nies Act 2013 with re­spect to ESOPs, and listed com­pa­nies need to com­ply with de­tailed Sebi reg­u­la­tions in this re­gard. Com­pli­ance with the For­eign Ex­change Man­age­ment Act, 1999 is also re­quired to be en­sured in case shares of a for­eign par­ent com­pany are al­lot­ted to em­ploy­ees of In­dian sub­sidiary or shares of In­dian com­pany are al­lot­ted to em­ploy­ees who are based out­side of In­dia,” says Shalini Jain, Tax Part­ner, Peo­ple Ad­vi­sory Ser­vices, EY In­dia.

Ex­perts point out that there were lot of grey ar­eas ear­lier as ob­served when the Ibibo group took over bus tick­et­ing firm RedBus, three years ago. A con­tro­versy had erupted fol­low­ing the ac­qui­si­tion, as even top-level man­agers claimed to have not ben­e­fit­ted from the deal.

Over the last four years, a new trend is emerg­ing among both listed and un­listed com­pa­nies. Com­pa­nies are mov­ing from per­for­mance-based vest­ing to time based vest­ing, mainly due to mar­ket fac­tors and the in­tense PE/ VC val­u­a­tions. “This is quite a vari­a­tion from global trends where com­pa­nies are in­creas­ingly grant­ing what is called per­for­mance units or per­for­mance awards. Ac­cord­ing to re­cent trends in the US, 82 per cent of the com­pa­nies re­quire sat­is­fac­tion of per­for­mance con­di­tions for vest­ing of awards,” says Harshu Ghate.

Even tra­di­tional com­pa­nies that are strug­gling at pre­sent are se­ri­ously look­ing at ESOPs as an op­tion to re­tain tal­ent. Tata Mo­tors is one among them and will soon hand over a small share­hold­ing to em­ploy­ees, in a first in the his­tory of large com­pa­nies un­der the Tata Group. Re­port­edly, Air In­dia is also plan­ning to of­fer ESOPs to re­tain its key em­ploy­ees, if a new suitor ac­quires the ail­ing gov­ern­ment owned air­line.

EY’s Shalini Jain says that even con­ser­va­tive fam­ily owned man­u­fac­tur­ing com­pa­nies are nowa­days look­ing at ESOPs as an op­tion to bring pro­fes­sional tal­ent and to re­tain key em­ploy­ees.

“If you look at se­nior man­age­ment com­pen­sa­tions of tra­di­tional es­tab­lished com­pa­nies, stocks are a huge com­po­nent and fixed salary is com­par­a­tively less. If a CEO’s salary is ` 15 crore per an­num, the fixed com­po­nent would barely be ` 2-3 crore while the rest is largely stocks and other vari­ables”, notes Su­dar­shan of EMA Part­ners.

As listed com­pa­nies grow each quar­ter and In­dia’s start-up suc­cess sto­ries un­fold one af­ter an­other, the ESOPs rags to riches sto­ries are also ev­ery­where, churn­ing out nu­mer­ous young mil­lion­aires.

With in­puts from Ajita Shashid­har

“OUR ES­TI­MATE IS AROUND 700 LISTED AND OVER 3,000 UN­LISTED COM­PA­NIES OF­FER ESOPs” Harshu Ghate Co- founder and MD, ESOP Di­rect “THE ESOP IS STILL THE MOST AT­TRAC­TIVE OP­TION TO BE OF­FERED BY COM­PA­NIES THAT LACK LIQ­UID­ITY” Ishita Sen­gupta Part­ner ( Global Mo­bil­ity Ser­vices), PwC

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