The consequence of the above is that more and more employees and executives will be offered remuneration in the form of ESOPs. Interestingly, in the West, it has been reported as much as 50 per cent and more of the remuneration to senior executives is in the form of ESOPs. For India and Indian executives - and, in fact, even for corporates - ESOPs represent a totally new form of instrument and method of remunerating and rewarding employees. Executives, therefore, will have to carefully understand and analysethe nature of this instrument as well as the particular scheme offered by his employer company.

ESOPs (as stock options and stock ownership schemes are loosely referred to in India) are, as sought to be implemented in India, basically of two types - stock options and stock ownership plans. In case of stock ownership plans, the employee is offered shares for which he pays for at a specially determined price (which may even be the prevailing market price). In case of stock options, however, he is given the right to apply, at his option, shares of the company at a future time at a predetermined price.

ESOPs thus represent a peculiar type of instrument. The employee is not paid in cash nor, in the case of stock options, is he allotted any shares. He is merely given an option to apply for shares at a price fixed at the time of the grant and he would be allotted shares on application at such price, whatever the price may be at the time of allotment. After the lock in period, if any, the employee can sell theshares and encash the profit, if any, on account of appreciation in the value of the shares. In the case of stock ownership plans, the employee is allotted shares at the first stage itself and after the lock-in period, he can sell the shares. An example will make this point clear. Say, the employee is offered options for 1,000 shares at a price of Rs 75. This price is fixed in advance and, after a period which is known as the vesting period, he is entitled to apply for shares at this price. Thus, assuming that the price after the vesting period is Rs 100, the employee will still pay Rs 75 per share and acquire the 1,000 shares. He may, after the lock in period, sell the shares, if he so chooses, at the then prevailing market price.

An employee, whether he is offered ESOPs by his existing employer or an alternative one, will clearly have to appreciate that the ESOPs are definitely not free and are, in fact, in substitution of a portion of his remuneration. In other words, apart from what he will pay for theacquisition of the shares, he would be losing some part of the salary and, hence, he will have to carefully evaluate whether or not it is worth opting for stock options and, if yes, to what extent. As stated earlier, each company will have its own scheme of ESOPs and the features would be different. Sebi has given almost unlimited freedom to companies to set up such schemes in any manner they prefer. In this article, it is sought to discuss those issues that the executive will have to bear in mind in evaluating the ESOPs. Incidentally, the company setting up such schemes will have to keep the same issues in mind while structuring the ESOPs so as to make them attractive for the executives while at the same time achieving its own objectives.

The first issue the executive could consider is whether the ESOPs are mandatory or optional. By this what is meant is whether the company will grant the employee the ESOPs mandatorily, without giving any choice to the employee. Alternatively, the company may give it as anoption and the employee can thus decide whether he at all wants to go for the scheme and, if yes, to what extent. In the present stage in India, it is found that companies grant ESOPs of a small amount, whether the employee asks for them or not. In such a situation, since normally there is no immediate outgo of funds by the employee, there is nothing to be done by the employee except to wait till the time comes when they are supposed to decide whether they will acquire the shares or not.

How well is the performance and intrinsic worth of the company reflected in the market price of the shares of the company? This will depend on many factors and only if the market discounts the shares of the company fairly and the employee really benefits from the success of the company on account of the efforts put in by all of them. Of course, if the company has set up a scheme of buyback of ESOPs at a fair price, which is often the case in the West, it makes a difference.

(to be continued)-- The author is aMumbai-based chartered accountant