Subramanian was in India last week, travelling to Delhi, Bangalore, Mumbai and Chennai, to familiarise Indian executives with the global trends in stock options. In an exclusive interview, she spoke to Nivedita Mookerji on the concept and its implications. The excerpts:

Do you look at stock option as a retention tool for employers orincentive for employees?
It depends on the industry. For example, in the high-tech telecommunication industry companies tend to use stock options as a retention tool and also as an incentive. But the incentive is incidental. Also, companies sometimes feel compelled to give the options because their competitors are giving them. So retention is the primary thing. Employees look at it as an additional compensation. They may use it over a period of time to make payments towards their homes or for any other purpose. Basically they use it as cash. So, while companies are implementing these programmes to create ownership, it does not happen that way with the employees.

So do you see stock option as a trap for the employee?
If it's on top of all the other compensation, it is not a trap. In that case, it's a win-win situation for the employees because they're not losing anything. But it could become a trap if the stock option is part of the total compensation. In a situation like that, if the stockprice plunges, the value of the total compensation goes down dramatically. But if the stock price goes up, it's an absolutely win situation.

How often is stock option a part of compensation?
In the US, companies started out in the 1980s with stock options as an add-on to the total compensation. Now they're moving to the total compensation approach. Europe, on the other hand, always looked at it as a part of total compensation. However, Europe has not defined it as clearly as the US. From the Indian market perspective, companies are looking at it from the total compensation point of view rather than as an add-on. It seems that Indian companies have learnt their lessons from the mistakes of their foreign counterparts. For the Indian companies, it's not the straight grant of options. They're looking at it from the point of accrediting a performance management system surrounding it, rather than giving a grant just because the next-door neighbour has done that.

What is the basic difference betweenthe stock option system in India and that in the West?
It is more paternalistic in India. Companies in India concentrate on the base and bonuses, as opposed to the variable component of pay. The variable component of pay is not that high as compared to what I have seen in the European or international market. The similarity between the Indian and European market is that both are looking increasingly at performance-based pay. So the variable component of pay in India, even if it increases in future with the advent of stock options, would remain performance based. Stock options in Indian companies will be tied to performance measurement and won't be a straight gift of shares.

Explain performance measurement in relation to granting stock options.

Suppose you're looking at a bonus programme and a stock option programme, there are two performance measures for them. In the case of short-term incentive programmes like cash bonuses, the performance would be targetted towards corporate performance.On the other hand, when you take the Employees' Stock Option Scheme (ESOS), or any other kind of long-term incentive programme, the targets are mainly tied to long-term business strategies rather than short-term goals. So companies need to define what performance they wish to target and what performance they wish to reward rather than just saying ``we want to have ESOS''. It's easy to implement ESOS, but once you implement it, you get stuck with it.

Talking of performance, companies should know what performance measures they want to reward, or whether they even want to reward a performance measure, or if they want employees to create wealth.

What is the future of stock option in India?
In the hi-tech and telecommunications industry, it is here to stay. But Indian companies are not plunging into it. And that's a very good news. In the other industries, the growth would be much slower.

Is there any alternative to stock options?
Not really. If it was a privately held company, thenyes--the stock options concept could get translated into a performance unit plan or stock appreciation rights. But the moment we talk about publicly traded companies, it's very difficult to translate it from the employee expectation point of view. The purpose of stock option is to somewhere along give shares to the employees, as part of their wealth accumulation. And if it's not shares, then what else do the companies give?

Has there been any change in the way stock options are designed? And are there any plans to phase out the stock option scheme?
In the US, stock option started as a management programme, and is now becoming a broad-based programme in which more employees are participating. In Europe too, it started as a management programme and is becoming broad-based. In India, on the other hand, it has started as a broad-based programme. It's not the management's forte as such. But any replacement of the stock option scheme in the near future is unlikely because it's a very attractivedevice.

To sum up, what are the positive and the negative aspects of stock options?
Among the positive things, stock option serves as a very good attraction tool. It is a very good wealth accumulator for the employee. It also serves, if properly designed, as a very good retention device. If properly communicated, and well understood by the employee, stock option can easily tie up with the business strategy, though not many companies do that. On the negative side, a company may give stock options with the objective of creating share ownership, but employees think that this is cash which they can churn around and use it for other purposes. Also it becomes an entitlement in the minds of the employees. They tend to feel that if they have been paid so much money today, they should continue to get it year after year. So once a company implements the stock option scheme, it becomes very difficult to take it away.