More often than not, tech companies are very enthusiastic about creating an ESOP pool and designing ESOP plans. Fancy plans are drafted but not implemented or if implemented, don’t serve the purpose and pose administrative challenges. The result - ESOPs become more of a burden! Traditionally, ESOPS made most sense for listed companies in a “liquid market”. Startups with ambitions of going public or aspiring for star exits adopt ESOP plans for all the right reasons... but over the years ESOPS seem to lose their shine! Here are a few thoughts I believe should be applied before adopting an ESOP Plan and announcing one!

  • Are you setting up an ESOP plan because your organisation needs one or are you doing it because it is fashionable?
  • Do you believe that your ESOP plan would retain talent and motivate people? This question is pertinent because a lot of times ESOP Plans are so employer centric that employees may believe it has nothing much to offer and is just a piece of plain paper!
  • As an employer do you truly wish that your employees own a piece of your company and enjoy the upside? If not...a simple bonus may be your answer!
  • Is your Plan truly meant for the CXO level only or for all employees that contribute to building your company?

The question of whether “to give or not give” needs thought. As management, it makes sense to think through whether you are truly are committed to living up to this as a compensation tool.

Effective April 1, 2014 the Companies Act 2013, has taken cognizance of ESOPs. Sec 2(37) defines an Employee Stock Option. Further, Rule 12 of The Companies (Share Capital and Debentures) Rules, 2014 brings out specific ESOP provisions to be followed even by unlisted companies whether private or public. Effective April 2014, unlisted companies that wish to grant employee stock options need to follow the provisions of these rules before issuing Stock options. ESOPS therefore needs some thinking through now...

Key changes after April 2014:
  • Under the previous regime, the definition of employee was not specific. Post April 2014, Employees eligible for ESOP specifically include only permanent employees and directors other than independent directors and employees or directors of subsidiaries, holding company or associate companies but clearly excludes independent directors, promoters and directors holding more than 10% of outstanding equity shares are no longer eligible for ESOP
  • Disclosure requirements are made more stringent. For instance, disclosure of appraisal process applied for determining eligibility, exercise period, process of exercise, classes of employees entitled to participate, method adoption by the company for option valuation etc. Are required to be disclosed
  • Issuance of ESOP Plan now has to be approved by Shareholders by passing of a special resolution. Additionally, separate approval of shareholders is required in case of grant of options to employees of subsidiaries or holding company and in case of grant of options to employees in excess of 1% of the issued capital in any financial year
  • Variation of the terms of ESOP plan can be made only to plans under which options have not yet been exercised and such variation should not be prejudicial to the interests of the option holders. Details of any variations, rationale for the same and beneficiaries of the variation are required to be disclosed
  • minimum period of one year between the grant of options and vesting of option is prescribed which reduces flexibility to a great extent with exceptions in case of options granted under a scheme of amalgamation or merger
  • specific vesting provisions in case of death, resignation and incapacitation are now prescribed leaving it no longer to the discretion of companies
  • Additional disclosure related to ESOP in directors report. (For more details please refer to Rule 12 of Companies Share capital and Debentures Rules 2014)

I am sure there are many more such questions and many schools of thought around this but it would be a useful exercise if the philosophy of stock options, grade of employees you wish to apply this to, objective of rewarding employees are well though through while devising ESOP plans so that such plans can serve their true purpose and then the questions of “giving or not giving” moves to more a more pertinent question of” how most effectively to give!”

It is inspiring to read about companies that believe in sharing a piece of their value and believe the contribution of each employee towards building their organisation from scratch.

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(Disclaimer: Views expressed in this article are personal views of the author and purely informative in nature)

Image by Irene Florez

First Published in Economic Times
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