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MUMBAI : Indian companies, especially new-age firms, are offering a cocktail of stock-linked incentives to retain their C-suite brigade, including phantom stocks, restricted stock units (RSUs), discounted stock options, and buybacks, despite a market downturn.

“While the market has softened, the need for a solid financial proposition for top talent hasn’t gone away. Employers remain keen not to burn cash. Therefore, discounted or face value stock with reasonable vesting terms remains a great retention tool, albeit at more employee favourable terms," said Sachin Rajan, country manager India for executive search firm Russell Reynolds Associates.

The demand for top talent has surged as companies expand their businesses after two years of a pandemic-related pause. Many companies are also digitizing their operations, acquiring rivals, and entering new sectors.

“Seven out of 10 CXOs have some form of equity weaved into their salary packages. Even two years ago, the number of CXOs getting different kinds of stocks was four out of 10," said Pranshu Upadhyay, regional director for search firm Michael Page India.

The move away from plain vanilla employee stock options comes on the back of margin pressures, and companies are putting all efforts into cost efficiency. At the same time, unlisted companies are trying out phantom stock options to attract senior talent. A phantom stock option is a performance-based plan that offers employees ghost or simulated ownership. The employee is given notional shares at a benchmark price with a right to exit at a future price, which could be the market/traded price or a price determined on the basis of pre-decided valuation criteria. Therefore, the company does not have to dilute its equity.

“Phantom stock plans work well for startups and are getting more popular because companies cannot dilute equity while hiring 200 employees from other sectors," said K. Sudarshan, managing director of executive search firm EMA Partners India. The startup sector, which was in a hiring frenzy last year, has seen large-scale layoffs as funding avenues shrunk over the past three quarters.

The other kind of stock plan being favoured is RSUs or stocks that are given at face value, unlike regular ESOPs, which are offered at market value. Harshu Ghate, co-founder and chief executive of ESOP Direct, said several private banks are keen on RSUs for their top management.

“With less visibility on how markets will perform after two years, sectors such as banking are keen on RSUs. It protects the employee against market volatility and acts as good retention and attraction tool," Ghate said.

HDFC Bank, for instance, announced that its board had approved the allotment of 100 million restricted stock units of Re1 each to mid to junior-level employees as part of its new compensation structure.

RSUs are a type of employee compensation where the company gives one or more shares to the employee on a future date if certain restrictions are met. Unlike stock options, employees don’t have to pay anything to get the stock in case of RSUs but have to pay taxes to receive the shares. These restrictions could include staying in the company for a certain period or performance-linked.

However, employees are often unconvinced by the different kinds of stock options and prefer a buyback plan where there is assurance that the firm will take back the shares from the employees after a certain period. Ghate said India saw $500 million worth of share buyback over the last 12 months from unlisted companies.

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