The SEBI guidelines for the stock option scheme allow for
discount up front but this will be reflected in the financial statements as
cost. In case a company is contemplating a stock option in lieu of a part of
cash payment, the issue would be whether to calculate the number of options on
the basis of such discount or whether some part of future increases have also to
be reckoned. It may not be easy to give stock options at different rates for
different people under the guidelines – primarily as shareholders approvals are
necessary.
Further, the guidelines require that information on the award
of stock options is reported. Most performance related pay is considered
confidential. This requirement under the guidelines insists on greater
transparency, which may not be appreciated by several Companies. However, where
a company is operating a stock-plan under the trust route and not under the SEBI
guidelines, secrecy can be pursued.
Stock options of some organizations:
Stock
appreciation rights and
The
phantom stocks.
Such organizations do not need to follow any guidelines, as
such but will be reckoned for tax purposes as applicable. The schemes may be
devised in such a way that the critical performance factors are determined in
advance and the linkage to the stock prices is established. The employee may be
given notional shares on the basis of his / her performance. These may be
encashed during the defined exercise period.
The benefit for the employee would be the difference
between the price at the time of allotment and the market price on the
date of redemption, if the stock prices have gone up.
The money is taxable in the hands of the employee as
income. The employee does not bear any cost, as the stock is notional.
Further innovations are possible in linking the performance
of the individual with the strategic issues of the company and the share
value. The underlying assumption would be that the performance of the
individuals should be related to the shareholder value in some way or the
other. That is, the organization expects the individual to enhance the
shareholder value through his performance in the company.The idea of linking individual performance to the shareholder value is
powerful and is expected to expand in the years to come. The linkage between
the two can be established either by a formal stock plan under the SEBI
guidelines for ESOS or through preferential allotments to an intermediary
trust, or through innovative schemes which may deal with notional instruments
only. In any case, the connection itself is important whichever route may
serve the company-specific conditions best.
