Comparing Employee Rewards
Comparing Employee Rewards
Key employees of a Company can be awarded by issuing shares of the Company to give them ownership rights. We are discussing herewith three employee reward options of employee benefit plans – (1) Employee Stock Option Plans (ESOP) (2) Stock Appreciation Rights (SARs) or Phantom Stock and (3) Issue of equity shares through performance Bonus. Below is comparative statement prof these 3 reward options.
| ESOP | SAR/Phantom Stock | Equity through Performance Bonus | |
| Alternatives | Employee Stock Option Plans (ESOPs) | Stock Appreciation Rights (SARs) or Phantom Stock. | Equity share issue on conversion of Performance Bonus |
| Law applicable | ESOP Guidelines under Companies Act, 2013 | No specific Law or Guideline. Instead of cash outflow if shares given to employee, then ESOP guidelines under Companies Act, 2013 applicable | Bonus being convertible into shares ESOP Guidelines under Companies Act, 2013 |
| Steps involved | · Grant of options · Vesting – one year from grant of option · Exercise of option · Allotment of shares as per Scheme terms |
· Grant of shadow stock · Vesting · Exercise and event of encashing · Appreciation in the value of shares between grant / vesting and exercise is to be given to employees |
Issue of shares of the Company to Key Employees will be funded by awarding them with Special Performance Bonus |
| Shares of the Company | Employee will get shares of the Company at some future date on exercise of option | Owners want to share the economic value of equity (appreciation in value), but not equity itself. | Employee gets shares of the Company on achieving milestone. |
| Payment against shares | Employees will have to pay the exercise price. It is defined in the scheme. | Employees do not have to pay the exercise price, but receive appreciation in cash | No liability for employee as his investment value is given by employer through bonus |
| To whom can be offered | Can be issued to Employees, Officers, and working Directors not holding 10% or more equity shares of the Company. | There is no such restriction of choosing employees. | There is no such restriction of choosing employees. But if scheme gives option of shares ESOP guidelines applicable. |
| Taxability | Twice – first when the options are exercised, taxable as perquisites in the hands of employee if fair value is more than purchase price. Secondly when shares are sold/transferred by employee, capital gain tax will be attracted | Employees are taxed when the right of encashment is exercised, at that point of time, the value of the entire appreciation is taxable | Bonus will be taxable in the hands of employee on receipt. Tax portion can also be covered while giving bonus (grossing up). |
| Legal formalities | Under the ESOP Scheme. Shares to be issued through provisions of Section 62 of the Companies Act, 2013 for ESOPs and under specified Rules. | Through executing Shadow Stock Agreement | Through executing agreement and provisions of Section 62 of the Companies Act, 2013 for preferential issue. |
| Operational flexibility | More flexibility to employee at the time exercising options | Less flexibility to employee if period is defined | Least flexibility as issuing shares is one time activity |
| Agreement | ESOP Scheme to be drafted. ESOP agreement to be executed. | An agreement defining period, appreciation value to be executed | An agreement defining Exit Option for the employee needs to be executed between Company, promoters and employee. |
| Valuation of shares | Valuation certificate from Registered valuer / Merchant Banker is required | Valuation certificate from Registered valuer is required | Valuation certificate from Registered valuer is required |