Rewards Special: Equity Compensation - part of overall compensation
ESOP Direct is a 12 year old organization set up in 2000. It has designed more than 500 mandates across various sectors and has experience in designing global plans. In totality, we are managing over 250 plans, covering over 100,000 option holders located across the globe. Our focus service offering is in the area of equity-based compensation. Any compensation given to employees or directors in the form of equity – is what we focus on. We envisage a long term engagement with our clients and are an end-to-end service provider in this space. We help companies in conceptualizing and designing the stock option plans, work with them in the communication of those plans to employees and we manage those plans on a day to day basis. We also handle the accounting and disclosure part. We extend this plan management services to include employees too so, whenever they are in need of help in financing or broking or foreign employees need to open demat accounts - we help them through our web-based platform. Our experience shows that employees face hardships in realizing their ESOP gains. These could be in the form of need for funds to exercise the options and requirement for a cashless exercise (where they do not need to invest any funds but only get the net difference). We have added these functionalities to our on-line platform –MyESOPsTM to ensure that the process is smooth, seamless and fast.
Since this is an area where not much information is available in the public domain on industry trends and practices, we conduct annual surveys covering the whole gamut of design, administration and compliance issues. We also conduct conferences to create awareness and sharing of industry experiences on an ongoing basis.
Equity compensation has been in use in India for close to 2 decades and has certainly evolved in a stable and well accepted form of compensation - both from a corporate issuer side, where companies have started in a particular way but learnt a few lessons and changed strategy, and the regulatory side, where there were initially some confusions and reversal of some policies in terms of taxation, etc. For the last 2-3 years, things are very much in place and stable. The most sensitive part related to equity compensation is taxation and that has been stable for the past 3 years and going forward, the same provisions will continue under the new direct tax code, which is supposed to be a long term tax regime. In terms of maturity, companies are experimenting with new things and new instruments based on their experiences and there is also a lot of learning from global companies as this instrument has been used globally quite extensively and creatively.
It is a niche area in terms of specialized service providers. There are companies who advice organizations on structuring of plans, hence, there are some HR firms and some accounting firms who do that. There is hardly anybody who is into the management of stock options and as an end-to-end service provider; we are probably the only one.
Equity compensation forms a part of the variable pay and we see that as a growing trend. We see it becoming a prominent portion of the overall compensation. Within variable pay, equity compensation is a non-cash cost in the sense that usually the market pays for it rather than the company paying for it. As far as the company is concerned, there is no cash outflow. Especially for companies, which are listed or are about to get listed, this is a preferred kind of compensation. In terms of the usage, we already see this being used across all the industries. Acceptability wise, it has been accepted across all sectors. The other trend that we see is that, within variable pay, there will be an increasing sort of expectation to link this form of compensation to the overall performance. Therefore, performance based equity compensation is a new trend that we see in 2012. We also see companies adopt learning from their previous experiences and there will be an increasing trend of granting more options to fewer people. Instead of having more people and less options, the trend would be to have less people and more options. In terms of ESOP, the gains are significantly higher than the fixed pay that one might get. The separation is that much more difficult if people have to forego potential gains.
There are different engagement models that we have. Since we are in the end-to-end space, we also have a packaged solution for end-to-end services called ESOP complete, which covers all aspects right from designing to the management of the plan. Each of the services are also offered as a standalone module, so we would just design the plan for a company and let them manage it, or some company might have a design but wants us to manage it. Designing services are usually charged as fixed price projects. On the management side, we have 2-3 different models, which are priced based on number of employees covered or size of the plan. We also have transaction based pricing.
As a dedicated player in this domain, our entire service offering is the approach to be a partner with the client in terms of making their ESOPs successful. We are not there to just advice them and come out of it and let them run it alone. We are there throughout the lifecycle to ensure that their objective of implementing ESOPs is achieved. We do whatever it takes to make it a success through the entire lifecycle.