Market's crash test adds shine to ESOPs (Employee Stock Option Programs) - 9/Sept/2008

Market's crash test adds shine to ESOPs
9 Sep, 2008, 0600 hrs IST,

Deepshikha Sikarwar & Vivek Sinha,
ET Bureau

http://economictimes.indiatimes.com/News/News_By_Industry/Markets_crash_test_adds_shine_to_ESOPs/articleshow/3460753.cms

NEW DELHI: The bloodbath in the stock market has
forced some firms to restructure their employee stock option programmes (ESOPs)
to assuage employees who are seeing a large portion of their
‘wealth’ disappear. Thanks to the market correction early this year,
a number of ESOP schemes have become redundant or gone “underwater”.
This means the current market price of the stock has fallen below the ESOP
exercise price.



This is true of most firms which issued ESOPs over
the past year and a half when the stock market was bullish. There are many firms
which announced ESOPs last year, particularly those which got listed in 2007.
All firms who have a vesting period of one year would either have to reprice the
options or see it as a worthless option at the hands of the employee which
won’t be exercised.



“Employees who got ESOPs before the
crash at the market prices then have seen a significant erosion in the value of
their options. This places them on an inequitable ground compared to employees
who are getting ESOPs priced at currently depressed share prices, as they would
get to exercise their ESOPs at a lower price. Companies in such a situation are
seriously considering repricing ESOPs issued earlier,” says Ernst &
Young partner Amitabh Singh.

So far, only a few have resorted to repricing. DTH firm Dish TV,
for example, has cleared a proposal to reprice at Rs 36.10, for options which
have been granted, but not exercised. In August 2007, Dish TV had approved its
ESOP Scheme 2007 where it planned to grant 30.7 lakh options to employees at Rs
75.2 a share.



In April this year, it approved the grant of 1.84 lakh
options at a price of Rs 63.95. However, the current price of Rs 39.05 makes all
these options redundant.



Consultancy firm ESOP Direct’s Tarun
Gulati says: “Sometimes, repricing may be required if the management feels
that the options were granted at a time when the valuation was unrealistically
high, in which case it’s more of a correction exercise.” He,
however, warns that repricing is a double-edged sword.



“If
done during usual market dips, it may signal insecurity and lack of confidence
in the future growth trajectory on the part of the management, which can send
out wrong signals to their people. It can also create wrong future expectations
in the minds of the employee that the company will continue to do so whenever
the prices are not favourable. This defeats the very purpose of a stock option,
which is intended to reward only if the market valuations are rewarding, and is
not generally meant to be guaranteed profit,” says Mr
Gulati.



Market regulator Sebi allows repricing of options if the
exercise price becomes less than the market price. Of course, options are
underwater not just in India. According to New York-based compensation
consultancy Steven Hall & Partners, as of June end, as much as 40.3% of
Fortune 500 firms’ stock options were out of money by an average of 34.5%,
i.e., they were trading at a price which was one-third less than the price at
which options holders could exercise them. A previous survey by the consultancy
in February had said stock options in one third of Fortune 500 firms were
underwater.