ESOPs are more complex than they seem, but are here to stay

Quick Facts

ESOPs: Usage and Spread IT & ITES sectors are the leaders, but growth and hunger for talent are driving adoption in other sectors. The reasons vary — for engineering services fi rms it is retention at the top; for banks, to woo talent despite lower salary; new sectors like aviation use it to attract talent from other sectors

The ESOP Coverage
Companies are offering ESOPs selectively with two out of three firms restricting it to only top quarter of the staff. Banks and financial firms buck the trend and have wider coverage Often, companies begin with a broad based ESOP plan but steadily become more selective: Equity is not an instrument that everybody understands. Many young people prefer cash in hand

Exercise Price
As many as 58 percent of Indian companies prefer to grant ESOPs at the current market price (thus escaping accounting charge and FBT) rather than at a discount. Companies who give out discounted ESOPs do so to reward past performance. Also, discounted options are mostly a one-time grant and given out in the early days of the scheme

Vesting Period
ESOPs in India typically have three to five years of vesting period. Rare though, sometimes companies do offer one year vesting which is the minimum period allowed when retention is not the sole objective of ESOPs (rewarding past performance could be one of the reasons). Bullet vesting — or vesting in one go — is rare

Vesting Conditions
Initially, ESOPs in India were largely time-based with companies focusing on employee retention. Slowly, ESOPs are being used to drive performance. A majority of companies (85 percent) who have performance-linked ESOPs implemented it after 2006. Half of all pharma, FMCG and construction and infrastructure firms are linking their ESOPs to performance. In the IT sector, it stood at 42 percent and in the media at 25 percent