Stock Options Shine as Indian Retention Tool

The survey, conducted by KPMG among 350 firms, including MNCs as well as listed and unlisted Indian companies, said that nearly 64% of Indian companies have implemented an Employee Stock Option Plan (ESOP).

The report notes that taxation of these plans in India has witnessed continuous change, and that up till the financial year ending March 1999, there were no specific provisions for taxing the benefits arising from ESOPs. KPMG notes that these programs were generally taxed as a perquisite in the hands of the employees on the difference between the fair market value (FMV) of the stock on the date of vesting of the options and the exercise price. The report notes that currently these benefits are taxable as perquisite and form part of employees salary income. The employer is required to withhold tax at source in respect of such perquisite. 

According to the report, the perquisite value is computed as the difference between the FMV of the share on the date of exercise and the exercise price, though there are specific valuation rules prescribed for listed and unlisted companies.

The report also notes that:

• Information Communication and Entertainment (ICE) sector dominates the ESOP space followed by Financial Services and Private Equity and Manufacturing and Consumer Goods sector, respectively.
• Indian companies with overseas operations are increasingly awarding equity incentives to attract and retain talent.
• Indian companies continue to prefer simple Stock Options over other types of equity-linked incentive plans.
• Indian companies prefer to incentivise only their key employees. Generally, there is one uniform plan implemented to cover employees at different levels, according to the report.
• Retention continues to be one of the key driver for ESOPs.
• Companies generally do not review their plans periodically to keep pace and align with the changing business environment.
• Generally, unlisted/private companies do not inform their employees on Fair Market Value (FMV) of the shares on a periodic basis.
• Companies believe that these programs enhance productivity, motivate employees’ and increase employees’ interest in the company’s overall performance.
• In view of the accounting impact, companies are generally averse to granting options at a discount.
• A vesting schedule of three to four years with annualised vesting is prevalent. Generally, ‘Performance’ is not a common criterion amongst Indian companies for determining the vesting schedule. It is still very much time based, according to KPMG.
• The majority of companies generally provide a window of two to five years to exercise vested options with no lock-in thereafter.

The report is available online at http://www.kpmg.com/IN/en/Documents/KPMG-ESOP-Survey.pdf.