Fewer cos dole out Esops as stocks fall

Written by Pradip Kumar Dey | Mumbai | Updated: Nov 14 2011, 09:18am hrs
Fewer companies issued shares to their employees under employee stock option plans (Esops) in 2011 until October compared with the same period the previous year, as conversion prices traded at a steep discount. Only 87 companies issued Esops in 2011, as compared to 101 during January-October 2010.

Esop is a deferred compensation plan that companies use to retain talent by issuing shares to employees at a discount to market price. An FE analysis shows employees have lost more than a third of the value of the shares or 34.3% in 2011 between January and October as compared to the same period the previous year, as the Bombay Stock Exchange Sensex fell by 15% in the 10 months in 2011.

Employees made R78.83 crore in the first 10 months of 2011, 34.3% less than R119.90 crore they made in the same period the previous year. Employees had a mixed bag of gain and losses.

IT services provider MPhasis, which issued stock options at a conversion price of Rs 675 a piece, trades 49.7% lower at Rs 339.65, while shares of distributor of hybrid seeds Advanta India trades two-fold at Rs 395.75, against Rs 185, its conversion price.

Esops are relevant and profitable only for companies with a technological edge, products which command uniqueness and high margins resulting in higher price earnings for the stock, says K Jayraman, research associate at domestic brokerage Bonanza Portfolio.

Otherwise, normal Esops of companies with moderate growth and in today's market condition have not put employees to any distinct advantage, he added.

Issue of Esops began with software technology companies to stem high employee exodus and later manufacturing companies followed it as talent demand exceeded supply. Apart from technology companies, pharma and non-banking finance top the list.

Esop is an incentive for employees to perform well, said Ramanathan K, CIO, ING Investment Management. There would be superior business growth, which will ultimately reflect in the market valuation of the company, and benefit employees who have got the Esop.

Equity as an asset class would always lead to long-term wealth creation, be it employee or investor. The falling stock market is not a deterrent to future Esops.

While stock issued at a higher valuation may merely lapse, we don't see this as a deterrent for the companies, says B Gopkumar, executive vice-president at Kotak Securities, a broker.

As long as companies feel they must involve employees in wealth creation, the stock would remain the preferred route, as they also have an element of loyalty reward built into them. he added.

Esop programmes will depend on the industry to which the company belongs to and the hiring strategies of the competitors. says Jagannadham Thunuguntla, chief executive, SMC Capital, a broker.