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'ESOP is an evolving theme in India' - Ragini Subramanian, Principal, William M Mercer

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DQI Bureau
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Ragini Subramanian, Principal,

William M Mercer.

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It is the new buzzword for India Inc

at large and IT industry in particular. Creating wealth and passing it on to the people

who made it possible, the employees. Not to be mistaken, it is the employee stock option

plan (ESOP) that we are talking about. Be it a Rs10-crore firm or a Rs2,000-crore

corporate, all are trying to hitch on to the ESOP bandwagon. Speaking to DATAQUEST on the

trends in ESOP here is Ragini Subramanian, a Principal with William M Mercer, a global HR

consulting firm. Excerpts from the interview:





When did the concept of employee stock option plan come into being?


The concept of ESOP came into being as early as the late forties in the US. But it was
restricted to a handful of companies. There was no specific share plan as such. The

activity gained momentum during the fifties, sixties and the seventies. It was growing

steadily but there was no hoopla around it. But in 1987-88, when Pepsi came out with the

stock option program for all employees, it gave a big thrust. And from that point

onward there was no looking back. Still, in the US, for a long time, it remained a

management program with stock options being limited to the top executives in the company.

The IT industry was the first to give it to more and more employees as it was 'bleeding'

for people. The only way they could get someone on the board was through this program. It

became an enchanting feature and everyone started asking, "why can't I have it?"

So, the companies started reluctantly giving it.


In Europe, it started with the UK

and to some extent companies in France, too, adopted the management program. Tax

legislators looked at it and asked, "What about the rest of the employees?" Tax

incentives were given for broad-based plans (stock options for all employees), while it

was taken away for the management programs. As a result, the broad-based programs started

becoming popular. The UK was a classic example.

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In the nineties, when the US

multinational companies started going to Europe, these companies looked at the options. If

the US-based employees could be given options, then why not the Europeans? The companies

started giving stock options to their foreign counterparts and it became a trend. It

started a chain reaction. The IT companies became commonplace as they were 'bleeding' for

people, and other companies which required IT personnel for technology advancement had no

choice but to offer stock option to their employees.

A similar thing happened in the

Asia-Pacific region where Australia, like the US, was a pioneer in this field. The US

impacted India partly because a large number of IT personnel in the US came from India.

So, the US companies had the same impact on India as they had on Europe. But India was

somewhat slow in doing it. The IT companies were the first to get on to it in India.

Who were the drivers of the stock

option programs?



In the US, it was the tax authorities that were the drivers. The securities

authorities were at the back-end. For instance, the Securities and Exchange Commission

(SEC) in the US makes it difficult with pre-approval requirements and

legislation requirements. But in India, it is the securities authorities like the

Securities and Exchange Board of India (SEBI) which are the drivers and have made it easy.

On the contrary, the tax authorities have made it difficult.

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What is the global trend

prevalent now?




As far as the global trends are concerned, it is for broad-based plans, where all the
employees get stock options, be it performance-based plan or non-performance based plan.

Coming to India, is it the IT

industry that is driving the ESOP?



Yes, it is the IT industry that is driving it. But I would like to believe that people

are still skeptical about it. They are not jumping onto the bandwagon saying it is a

wonderful thing.

Do you think it is because of our

mindset, where people have a pessimistic view?




I wouldn't say that. It would be more in the nature of a cautious mindset. People seem to
think that 'let me see whether it makes sense for me.' We are very emotional people. We do

not like to be taken advantage of. Relationships matter to us a lot and we don't want to

get hurt. So, it is a cautionary approach. Another thing is that they do not have a herd

mentality. They do not do it since everyone else is also doing it. That is a great thing.

I would be extremely happy if-which unfortunately is not happening-a company looks at the

options from its point of view and thinks how it can distinguish its stock option plan

from the next-door neighbor. The Indian companies should look at different options and

each company should choose the one best suited for it. This will also make it difficult

for the employees with large stock options to play the market.

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As far as the Indian companies

are concerned, is the trend toward broad-based plans?



Yes, in India the trend is toward broad-based plans.

What are the hurdles that India

faces in implementing stock option plans?



Right now it is very difficult to say what the hurdles are. This is because the SEBI

guidelines are at a fairly early stage. There are a few loopholes in the guidelines and

people can play with them. For instance, there are certain areas in the guidelines which

do not describe who 'a related person' is. This can be subject to interpretation. SEBI

doesn't ask for too many details. In the US, the securities authorities ask for a whole

lot of horrendous questions. SEBI is fairly open in this regard.

But don't you think it is one of

reasons that a lot of insider trading is taking place?



Yes, in the US, there are a whole lot of insider trading rules India>. But SEBI does not talk about insider trading in its ESOP guidelines. And people

can easily play with the market. SEBI has to think about it. In fact, the stock option

plan is an evolving theme in India.

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What will be the future trends in

India? Will companies go for performance-based plan or non-performance based plan?




For most companies, it would be performance-based plans, at least at the management level.
It would depend on a number of factors. To make an extremely general statement,

performance-based plan may be better than non-performance based. But there should be

different parameters for judging the performance. A management employee should not be

judged on the same scale as a non-management employee.

What are the advantages of

implementing an ESOP?



One of the greatest advantages is the retention factor. Companies have been able to

bring down attrition rate drastically. Another factor is that if the program is done with

a proper objective it may be able to bring loyalty and excitement among the workforce.

Today, we find that the loyalty factor is missing. This does not mean that the employees

will stick with the company forever, but at least they will not speak ill of the company.

And people will leave the company not because they feel like leaving, but for a very

substantial reason. Another thing is that it enhances the performance and also brings in a

sense of responsibility.

So, what do you think is the

future of stock option programs?



In the US and Europe, companies are not making use of ESOP wisely. Quite a

few companies, especially IT companies, have used it wisely and have achieved the results.

In India, if a company does it for the right reason and does it right with a specific

purpose, it will definitely yield results. You should not follow the next-door-neighbor

policy, look at the three 'whats.' What it means to you, what it will do for you and what

you want it to do.

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