Tweaked stock options, coming soon to a job contract near you
India Inc. is beginning to juggle different kinds of stock options as attracting and retaining top talent over a long period becomes tougher. Companies are creating hybrid forms of stock options instead of plain-vanilla ones.
And consultants say many of their clients are moving towards stricter forms of performance and restricted stocks. “Companies that have traditionally been on an employee stock option (ESOP) structure are moving towards the adoption of performance-based and time-based restricted stock units (RSUs)," said Dinkar Pawan, director at Deloitte. An RSU is typically a certain number of company shares allotted to an employee as an incentive after completing a specified tenure.
In performance stocks, the shares are allotted only if the employee meets certain goals, stays a specific time at the company, and the firm also meets its target in the sector. For firms, these kinds of stocks are "less dilutive". The experiment is also to protect the firm's interests as much as attracting potential candidates.
"Companies where share price growth is more volatile tend to prefer full-value awards like performance shares and RSUs. That’s because the exercise price can move dramatically from one day to another in these companies despite no change in the fundamental realities of the businesses," Pawan said. According to EY's report on such long-term incentive plans (LTIPs) that was carried out in FY22-23, RSUs are the second most preferred plan after ESOPs.
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