Presentation on ESOP

Employee Stock Ownership Options

Stock options are opportunities provided to employees to buy company stock at a set price immediately or sometime in future for a stated period.

It is a form of variable pay compensation package.

Indian companies which have introduced ESOPs are

Infosys, Wipro, Godrej, GE & P & G.

Employee Stock Ownership Options

ESOPs are becoming popular, owing to:
1) The shift from industrial to information revolution. 2) Public policy in many countries favour giving employees

a share in equity & profits.

3) In the light of disinvestments & privatization of public enterprises, employees are offered shares to ease their opposition.

Employee Stock Ownership Options

ESOPs are offered to employees due to:
1) Attraction 2) Retention

3) Motivation
4) Financial participation by the employees in the wealth

created through joint efforts.

5) To garner employees commitment.

Employee Stock Ownership Options

6) To develop common purpose between employer & employees. 7) To promote corporate performance.

8) Performance based reward.

9) Supplement retirement / social security benefits. 10) To hedge hostile take over in future.

Salient Features of ESOP

Who is covered?
Any employee except the promoter or director is covered under it.

Requirements:
a) Setting up of compensation committee of the board, the

majority being independent directors for administration &

superintendence of ESOS.

b) Shareholder approval through a special resolution in the general meeting, disclosing to them details about the ESOS. c) Disclosure in the directors report of all the details of the ESOS including employee-wise details.

d) Compliance with accounting policies.

e) Certificate from auditors that the scheme has been

implemented in accordance with the guidelines as also

the resolution of the company in the general meeting.

 Non Variation of the terms of the ESOS.

They cannot be varied in any manner which may harm employee interests. However, the terms may be changed through a special resolution in a general meeting provided the ESOS has not yet been exercised by the employee.

Pricing.
Companies have the freedom to determine the exercise price in conformity with the accounting policies specified. Any discount on the fair market value has to be reflected as deferred employee compensation in the accounting entries.

 Lock-in period & rights of the option holder.

a) The employee will not enjoy the benefits of a shareholder
till are issued the exercise of the option. b) The amount payable by the employee, if any, at the time of grant of option, may be forfeited by the company if the option is not exercised within the exercise period or it

may be refunded to the employee if the stock options are

not vested due to non-fulfillment of the conditions related to it as the ESOS.

c) The company has the freedom to specify the lock-in period with a minimum of one year between the grant & vesting of options.

Non-transferability of option.
Options granted to an employee shall not be transferrable. In the event of the death of an employee while in

employment, all options granted to him or her till that date

should vest in the legal heirs or nominees of the deceased employee.

Popular ESOPs
Employee Stock Purchase Plan Profit Sharing Plan

Advantages of ESOP
1) Funded by the market, not by the organization. 2) Amounts can be sufficiently high to ensure adequate motivation. 3) Implies ownership in the organization. 4) Creates a sense of employee ownership in the business. 5) Flexible in design.

Advantages of ESOP
6) Rewards are tied to value creation. 7) Self-funding based on economic value creation. 8) Inculcates a performance driven culture. 9) Promotes team work. 10) Provides spectacular gains to employees, i.e: wealth creation.

Disadvantages of ESOP
1) The pay-out is unpredictable. 2) Amounts may be insignificantly low. 3) Not always available as an alternative, e.g: when dilution of equity is not acceptable to the owner. 4) Lock-in periods & other conditions may dilute perceived value. 5) Employees are subject to the vagaries of the market.

Disadvantages of ESOP
6) Administrative hassles exist. 7) Lock-in periods may have a negative impact on employee returns. 8) Performance may sometimes not lead to good payouts, i.e: high dependency on market conditions.

9) Pay-out matrix & rules & regulations are at times

difficult to understand.

Thank you..

Presented by: Ekata (11 Supriya (44