A STUDY ON THE IMPACT OF EMPLOYEE

STOCK OPTION PLANS ON CORPORATE

FINANCIAL PERFORMANCE IN SOFTWARE
AND PHARMACEUTICAL SECTORS
Presented By
R

Sukesh

15MBAP054
MBA I Year
Sub: Financial Management

Article Details
Authors: S Poornima and K Nithya kala
Journal: Prerana Journal of Management Thought and Practice
Vol No: 7
Year : March 2015
Page Number: 39-50

INTRODUCTION
Employee Stock Option Schemes (ESOSs) once unheard of in
India are gaining popularity rapidly, especially during the past few
years
ESOPs are seen as an important human resource tool
ESOPs help companies to retain staff, attract talent, motivate
employees and enable them to share the long term growth of the
companies as well as the shareholders

CONT.
ESOP create excitement and hope among employees to own shares
of the employer company
Information
Technology,
Pharmaceutical,
Communication,
Entertainment, Financial and Technology driven companies use
ESOPs as a tool to reward and motivate employees
Azim Premji led Wipro first brought the concept to India in the late
1980s

CONT.
According to European Federation of Employee Share Ownership
(EFES, 2012) nearly 53.4% of companies in Europe are estimated to
be employee-owned, in France, Japan, US and UK and it is 80 to 90%
Whereas in India at present only 4.5 percent companies in India have
allotted ESOP
These sectors are increasingly becoming the engine of growth in our
Indian economy

OBJECTIVE
To study the overall impact of ESOP on corporate financial
performance in software and pharmaceutical companies in
India.

METHODOLOGY
This study is descriptive in nature
Study consists of 124 companies in software and pharmaceutical
sectors that are listed companies in BSE which have allotted employee
stock options from the year 1st April 2000 to 31st March 2008
The sampling method used in the study is purposive sampling
Final sample constitutes 80 ESOP companies i.e. 60 in software and
20 in pharmaceutical sectors

CONT..
Financial data pertaining to the period 1st April 1996 to 31st March
2012 are used for the study
study took the assumption that ESOP allotment year as 0, pre
allotment years as (-1,-2,-3 -4) and post allotment years as (1, 2, 3, 4)
respectively
The statistical tools like Percentage analysis, Mann-Whitney U test,
and Regression has been used

PROFILE OF ALL COMPANIES

Description
Sector
Year of ESOP
allotment

Coverage of Plan

Magnitude of ESOP

ESOP Companies

Software
Pharmaceuticals
2000-2002
2003-2005
2006-2008

60
20
3
8
69

75
25
4
9.7
86.3

Broad-based (options
granted to employees at
different levels )

34

42.74

Key Employees
Low
Moderate

46
24
32

57.26
29.8
40.3

High

24

29.8

SIGNIFICANCE OF VALUE ADDED PER

EMPLOYEE RATIO IN PRE- AND POST-ESOP
Sector

Software

Period
Pre- ESOP

Sum MannMean
of Whitney
rank
ranks
U
202.51 43742

Post-ESOP 230.49 49786

Pre-ESOP

65.96

Pharma
-ceutical Post-ESOP 95.04

Z value

Sig

20306

2.329

2037

3.969

**

5277
7603

REGRESSION SYNTHESIS FOR SOFTWARE

SECTOR
Dependent variables

Independent Variables
ESOP Period (Pre/Post)
Debt to Equity Ratio
Sales Growth
Employee Growth
Age
Main Shareholder Power
Total Assets
Value Added per Employee
Asset Turnover Ratio
Capital Intensity Ratio

ROE
Ns
Ns
Ns
Ns
Ns
(-) **
Ns
Ns
(+)**
Ns

Performance
ROA ROCE
(+) ** (+) **
Ns
Ns
Ns
Ns
Ns
Ns
Ns
Ns
Ns
(-) **
(+) *
Ns
Ns
Ns
Ns
(+) **
Ns
Ns

(+) or (-) Symbol of the relationship , ** Significant at 1 % level, * Significant at 5 % level;

Risk
MCNW BETA
(-) ** (-) **
Ns
(+) *
Ns
Ns
Ns
Ns
(+)** (+) **
(-) ** (+) *
Ns
Ns
Ns
Ns
Ns- Not Significant

CONCLUSION
The results reveals the fact that pharmaceutical companies
outperformed the software companies after allotting ESOP
The Mann Whitney test results that there is significant improvement
in value added per employee after allotting ESOP
Regression analysis reveals that the ESOP is not have significant
impact on the financial performance of the companies

SUGGESTION
Most of the companies allotted ESOP on the recession period 20062008
That may have negative impact on ESOP
So companies need to redesign the timing of allotment of the ESOP
and increase the magnitude of ESOP
Proper awareness and series of communication programs need to
give to employees regarding ESOP