Structuring ESOP:

Keeping employees glued to companies is becoming very difficult for the employers of Infotech and other knowledge based industries. Many Infotech companies are now using ESOP tool to keep employees' turnover low. Designing and implementing ESPO is not an easy job. Companies have to keep various factors in mind and strike a balance between various interested groups like employees and shareholders. Additionally tax impact on the ESPO should also be intelligently planned.

There are many such issues and thoughts which must be kept in mind while structuring ESOPs. Lets have a glance how software majors are implementing ESPO.

Market leader Infosys Technologies Limited first implemented ESOP in Sep.1994. Company established Employees Welfare Trust and transferred 750000 warrants to the trust for the benefits of eligible employees.

How trust purchased warrants? Company gave loan to the Trust so as to purchase warrants. Subsequently, Trust transferred the warrants at Rs.1/- each and each warrant entitles holder to acquire one share of the company at RS.100/-.

Second ESOPs were offered in 1998. Here in this scheme, company offered options, which were exercisable for equity shares, represented by ADRs.800000 shares are reserved under the plan to be issued. Govt. put higher ceiling of US $ 50 within which shares to be issued. So, number of equity shares keep on changing with the changes in the price of shares. There after in 1999 company also reserved 3.3 million shares to be issued under ESOP.

There are certain performance parameters for employees to be eligible for this scheme. Like performance of the employee, minimum service period, present and potential performance of the employee for the success of the company. Shares under ESOP were issued with 5 years lock in period under the first scheme, while for the new schemes this power is with committee of directors.

There are cases where company may wants to offer immediate benefits to employees, and in that case company may offer direct shares to employees instead of ESOP. Shares can be offered at discount or at market value. If offered at market value, these aims at performance based future gains.

Substitute for ESOP is SAR (Stock Appreciation Rights). Under this plan every employee simply gets an amount equivalent to the appreciation in the stocks granted to her under ESOP without any shares actually changing hands. For instance P & G, granted all its employees in India 100 shares in P & G Worldwide under SAR at US $82.50 per share. Redemption date is fixed as 2003, and every employee will get US $ 100 for every raise of US $1 in share price. So, if the share price becomes US $ 100 in 2003, every employee will get rupee equivalent of US $1700.50 per share.

So, there are many ways to motivate and keep the employees with the company. Side effect being, bloating in book value of shares of the company. As the shares will be issued at very cheap rate, book value of existing shares gets affected. SEBI guidelines specified that difference between exercise price and market price of the shares to be debited to Profit & Loss Account.

So, this is a balancing act by the company to achieve twin benefit of employees' motivation and future performance of the company.