The slump in the equity market has not spared anyone. It used to be a steal to get shares of the company one worked in as an employee stock option plan, or Esop. These were usually offered at zero cost or were heavily discounted. They were an attractive deal till stock prices came crashing down. Many shares given in the last five years are at levels that are equal to or lower than the price at which they were granted, even if the offer price was half the prevailing market price. Above all, there is the job uncertainty.
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To figure out what you should do with stock options, you first need to understand how Esops work.
Basic structure
Typically, a compensation package in the earlier days had a salary component and stock options. For example, a package of, say, Rs20 lakh consisted of a salary income of Rs10 lakh and Rs10 lakh as stock option. The latter reflected the value of the employee’s holdings after he got ownership of the shares by exercising his rights. So if an employee used the option and paid, say, Rs5 lakh at a time when the shares were worth Rs15 lakh as per the market price, the difference of Rs10 lakh was the employee’s benefit. Now, he could either hold on to the shares or sell them the next day.
All Esops are not structured the same way. The basic rules, however, remain the same as guidelines set by the market regulator have to be followed. A lot depends on the set of beneficiary employees. Says E. Balaji, director and CEO, Ma Foi Management Consultants Ltd: “IT companies tend to give Esops across the board, while non-IT companies limit it to the top management and critical roles” (read Building Blocks to understand how Esops work).
Whither now?
During the past few years, when the stock markets were on an upswing, the market price usually remained higher than the price at which you got the options. Many employees opted to take Esops and many didn’t. What should you do now? The answer depends on the present position of your stock options, job and finances.
• For those asked to leave: Even if an employee is asked to leave, the right to own the company’s shares holds. All unvested options expire on the date of leaving the firm but vested options can be retained. This, however, will also depend on how soon the vested options need to be exercised. Usually, it is within a specified period after resignation or termination.
•For those staying put: If you are relatively sure of your job, your approach towards stock options will depend on whether you have exercised all your grants in one go or in tranches.