Stock options no substitute for cash, fail to hold back junior staff

Stock options no substitute for cash, fail to hold back junior staff
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First Published: Fri, Oct 05 2007. 12 19 AM IST

Point of view: Prabir Jha, global head, human resources, Dr Reddy’s Laboratories Ltd, says that in a booming market, companies are offering staggering amounts of cash to get employees.
Point of view: Prabir Jha, global head, human resources, Dr Reddy’s Laboratories Ltd, says that in a booming market, companies are offering staggering amounts of cash to get employees.
Updated: Fri, Oct 05 2007. 12 19 AM IST
New Delhi: Stock options as a retention tool seem to be falling out of favour with junior and middle-level executives in India.
Although a number of companies, such as iGATE Global Solutions Ltd, Satyam Computer Services Ltd, HCL Technologies Ltd, NIIT Technologies Ltd, GlaxoSmithKline Consumer Healthcare Ltd, Ranbaxy Laboratories Ltd, Mahindra & Mahindra Ltd, ICICI Bank Ltd and Dabur India Ltd, cover junior managers under their Esop (or employee stock options plans), they are increasingly realizing that Esops aren’t all that popular among certain employees.
ICICI Bank, for instance, has come to the conclusion that an Esop is a lot less attractive to junior managers who would rather get cash rewards. It has since decided to withdraw an Esop scheme for the junior-level employees.
“It is clearly about cash,” says K. Ramkumar, group head, HR, ICICI Bank. “In our enthusiasm to use Esops as a tool to retain and reward the top talent in the junior level, we extended the scheme but we suspended the offering since it didn’t have any desired effect.”
Point of view: Prabir Jha, global head, human resources, Dr Reddy’s Laboratories Ltd, says that in a booming market, companies are offering staggering amounts of cash to get employees.
Curiously, the decision to introduce long-term benefits for junior employees at the bank was made after an internal survey showed many in favour of stock options.
While Esops are still popular among information technology companies, there have been prominent cases of pull backs even among IT companies.
Bellwether Infosys Technologies Ltd, for instance, suspended a plan that offered stock options to all employees since July 2004. “While technology companies have been slightly more successful with stock options as a tool to retain, most companies have not been able to keep their junior to mid-level managers with stock options offering,” says Sandeep Chaudhary, business leader-India, Hewitt Associates, a human resources consulting firm.
“It’s about here and now. In a booming market, why would an employee opt to wait for a few lakhs for three to five years when companies are throwing staggering amount of cash to get them,” says Prabir Jha, global head, human resources, Dr Reddy’s Laboratories Ltd.
Another reason cited is the different profile of the junior-level employees who typically don’t seek long-term careers with one organisation.
“They are young and restless,” says P. Dwarakanath, president, National Human Resource Development Network and director, group human capital, Max India Ltd. “They want instant gratification in everything they do.”
Also, what has largely hurt the success of Esops as a retention tool in case of junior to mid-level managers is the amount of shares offered, with top and senior management usually getting shares of any significance.
“The number of shares offered to junior managers is not so large that its benefits can’t be outweighed,” says Jha.
Now with the additional burden of 33.99% FBT (fringe benefit tax) on stock options, which can be recovered from employees by companies, those who do not get a significant number of stocks in hand, will not find Esops attractive,” says Dwarakanath.
Meanwhile, companies that have not extended Esops to junior staff say they want to keep share dilution within manageable levels. Many companies, thus, restrict it to their senior and middle management who are critical to the growth of organization,” says Nishu Miglani, general manager, IT Practice, Manpower Services India Pvt. Ltd.
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First Published: Fri, Oct 05 2007. 12 19 AM IST