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
Performance

Enhance
Retention

Attract
Talent

Reward
Loyalty

Objective Of ESOP
Improve
shareholders'
value

Motivates the
employees

Retirement
plan

Wealth
creation for
employee

Sense of belonging
and ownership
amongst the
employees

Whom to give ?

Management
Structure

Senior

Middle

Junior

50-70%

30-50%
ESOP
Allocation
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

HR creates option
plan

HR approves
exercise
transaction

Employee accepts
option plan

HR collects
payment

Vesting
period

Employee
exercises
options

Shares are
issued into the
employees
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 Murthys 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 years 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

employees loyalty and performance.

In 2006, it offered performance share plan to senior executives .
But by 2008 They realized 2005 wide-base ESOP strategy

wasnt 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 Banks 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