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Performance pay may be awarded in cash or kind or
both. This award may be deferred or immediate. Stock Options are
typically deferred pay. The quantum of the reward cannot be determined
so very accurately in the case of the stocks as is possible for cash
payments. The reason for this difficulty arises due to the variable
nature of the benefit, which is dependent on the market perceptions for
the stock. Most schemes abroad do not envisage any concessions up front
for the employees – i.e., the grant price would be the same as the
market price.
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The real incentives lie in the prospect for the shares. The
higher the shares climb in the market the greater would be the benefit for them.
The difficulties in predicting the future benefits impinges
on the calculations of the number of shares / options to be awarded.
Consequently, the trade-off between the cash element and the stock options are
difficult to calculate.
Issues Faced
Almost all organizations in India, which are operating a
stock plan for the employees, reckon the need for performance linkage. They
award stock / options / warrants on the basis of best guesses as to what would
be the optimum for a given level in grade and performance.The issue faced by most of these
companies is not so much with the plan itself as much as the preference of
employees for cash in hand as against deferred and uncertain payments.
Employees normally assume that the stock options with all the
conditions have been awarded at the cost of bonus in cash. Employees may want to
see the up-front concession being given vis-à-vis the market price and whether
this is more than their expectation of the equivalent cash reward. This is so
because the shares are normally not given free of cost. The challenge for the
organizations lies in convincing the employees that there is no trade-off in
reality or that such a trade-off is not likely to be adverse to their long-term
interests.
