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Pareto’s Principle
High attrition
Talent Management
• So if the employee has to get the entire 100 shares, the period
would be 10 years.
Implementation of ESOPs
FEASIBILITY STUDY
• Preliminary Appraisals
• Design Study
• Financial Analysis
Length of service
Seniority
Grades
Responsibility handled
Market value for specific skills
Achievements & Potential
Loyalty
Performance appraisals
Potential contribution of the employee
HOW DO ESOPs WORK?
No maximum limit up to which ESOPs can be issued to an
employee
The said price at which the employee buys the option is usually
lower than the prevailing price of the share in the market.
An option is said to vest in the employee when he/she
is given the right to apply for shares
The difference between market price and the option price is nothing but a
cost to the company and should be charged to the P&L account.
If the company tanks, employees may end up burdened with worthless paper
in the form of sweat equity.
On the contrary, when the company performs too well, and so the options
appreciate in value, there can be criticism that the employees have been
benefited the most.
ESOPs AT INFOSYS
• When employees join they are offered say 100 shares at the current
price in the market which can be bought as and when needed and that
too at the same rate.
•Even after 2 yrs, the employees can buy the shares at the same rate.
• In the 1st year, employees can’t buy any shares, in the 2nd year
he/she can buy 30 shares and then in the 3rd year, he/she can buy the
remaining no.of shares.
12.2.05 12.2.06
Market Price Cost of acquisition
300/- Sale Price Fair market value
100/-
on the date of the gift
The answer to this is, ‘Yes’. The employee who is entitled to the ESOP may
gift the options to any person. However, the donor will have to pay income
tax on the notional gains on the date of gift i.e. he will have to pay capital
gains tax on the difference between the fair market value of the gifted
shares / warrants on the date of gift and the option price, if it has already
been paid.
The done, if and when he actually sells the shares will have to pay capital
gains tax on the difference between the actual sale proceeds and the fair
market value on the date of gift.
The reason for having this provision is that, in the past, many employees
gifted the option shares / warrants to relatives / friends without paying any
tax. These friends / relatives sold the shares / warrants and either, gifted
back the sale proceeds to the employee, or in case of a close relative such as
spouse, let the money remain with the spouse.
SUMMARY ……
• An option to buy the company’s share at a certain price
which could be the market price or some other price.
• To make an ESOP attractive, the option price is lower
than the market price.
• Option to acquire shares is generally exercisable over a
time period known as Vesting period (1-5 years ).
• The first options are exercisable generally after a year.
• ESOPs work as an incentive for retaining employees
since options lapse if the employee leaves employment
before the vesting period is over.
ESOP is not something
that is ‘free’
or some benefit
that is ‘immediate’