Tweaked stock options, coming soon to a job contract near you

“Companies that have traditionally been on an employee stock option (ESOP) structure are moving towards the adoption of performance-based and time-based restricted stock units (RSUs),” said Dinkar Pawan, director at Deloitte.

An RSU is typically a certain number of company shares allotted to an employee as an incentive after completing a specified tenure. In performance stocks, the shares are allotted only if the employee meets certain goals, stays a specific time at the company, and the firm also meets its target in the sector. For firms, these kinds of stocks are “less dilutive”.

The experiment is also to protect the firm’s interests as much as attracting potential candidates. “Companies where share price growth is more volatile tend to prefer full-value awards like performance shares and RSUs. That’s because the exercise price can move dramatically from one day to another in these companies despite no change in the fundamental realities of the businesses,” Pawan said.

According to EY’s report on such long-term incentive plans (LTIPs) that was carried out in FY22-23, RSUs are the second most preferred plan after ESOPs. This was followed by stock appreciation rights (SARs), which have seen a fall due to the cash crunch and market slowdown owing to the pandemic.

“There has been 25-30% increase in the last few years of companies who want to introduce a variety of stock incentives for their employees,” said Shalini Jain, tax partner, EY India. “For senior employees who have the ability to influence the profitability and growth of the organisation, very often vesting is linked to achieving a particular ebidta / revenue target for them,” she added. Ebitda refers to earnings before interest, tax, depreciation and amortization.

While large firms remain partial to conventional ESOPs, fintech and SaaS-based startups, small and medium-sized companies, and some private banks have approached consultants who work on compensation and rewards. Deloitte, for instance, has been approached by clients to bring in the changes in its stock plans. The timing is on the back of a lethargic hiring sentiment.

“While overall attrition and hiring has softened, companies are picking up strategic and niche talent that is now more affordable, keeping in mind the future requirements,” Roopank Chaudhary, partner, human capital solutions, India, Aon, said. “We are also seeing organizations move away from one primary LTI to a mix of multiple vehicles given the behaviour that needs to be driven.”

Chaudhary noted that while ESOPs were far more prevalent earlier and aimed at wealth creation, “there is a growing trend towards moving to RSUs or PSUs given the volatility in the markets and also to drive retention and long-term performance”. ESOPs give an employee an ownership in the firm in the form of shares of stocks and works as an employee benefit plan.

According to law firm Khaitan & Co., about 10-12 of its clients asked for a hybrid form of stock option plan in the past one year. “Largely, SaaS-based tech firms and fintech companies have asked for a hybrid plan in which part of the stock options are regular ESOPs while others are RSUs or performance-based,” said Vinay Joy, partner at the firm’s employment, benefits and labour practice. Joy pointed out that companies whose parent firms are based overseas, such as global capability centres, are keener on RSUs.

Over the past couple of mercurial years in hiring, companies also juggled with reducing the vesting period of stock options from a few years to sometimes as brief as a month, allowing companies to provide greater cash in hand for employees at regular intervals.

However, it must be noted while unlisted companies follow provisions of Companies Act, 2013, Indian listed ones need to follow Sebi Regulations on ESOPs. The vesting period from the time of granting the stocks for companies registered in India is one year.