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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