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D. Murali

Chennai , June 15

On June 5, Forbes (www.forbes.com) reported, `Yahoo's Semel to take home $1 a year in salary'. The story, written by Mr Chris Noon, called the 8 cents a month pay deal to Yahoo CEO Mr Terry Semel `a sheep in wolf's clothing', because of the liberal offset provided in the form of `millions of company stock options'.

Citing SEC (Securities and Exchange Commission) documents, Mr Noon wrote that Mr Semel had sold `18.1 million of his stock options for a gain of $429 million over the past three years', and that he held `another 17.7 million unexercised stock options before Yahoo refilled his coffers'.

Options are hot. For, as at the time of writing this, Seattle Post Intelligencer reports that stock options investigation in the US by the SEC is getting wider. Monster.com is among about 30 companies whose stock option awards practices have attracted attention, informs www.nytimes.com in a report dated June 13.

Keeping aside Uncle Sam's ongoing probe into options, let us look at the feasibility of the Semel formula in India. How about a salary of Re 1 per month, or an auspicious Rs 101 per annum (meaning, about Rs 8.40 every month), and the balance as stock option?

Liberal tax regime

Ours is a very liberal tax regime, says Mr V. Ranganathan, a Chartered Accountant. "As long as the stock option scheme satisfies some broad criteria, which it should be possible for any company to do, the idea is eminently feasible."

He points out that options are not taxed as a perquisite either on the grant or on exercise. "Also, the law on capital gains is friendly, at 10 per cent for short-term and zero for long-term."

Indian accounting rules are also liberal, adds Mr Ranganathan. "We do not require ESOP (employee stock options) to be cost-ed the way the US does. In the company's books, ESOPs are expensed at the difference between market price and grant price."

potent tool

Can ESOPs be a loyalty-building strategy that employers can use? ESOPs are a potent tool, says Mr Ranganathan. "Companies typically impose of the condition of vesting in a manner that employees' loyalty gets rewarded." That way, stock options can be the yet-to-hatch eggs, or a distant carrot.

There's nothing to stop software professionals from taking the high road of ESOP, as a tax planning measure, without any hazards. But there is one flip side: the market. As long as the company is doing well on the charts, and there is appreciation of the price, employees can be happy. "If your salary is adequate to care of your current consumption needs, ESOPs can take care of all long term needs, provided there is the upside," counsels Mr Ranganathan.

What if the employee were to consider a job-switch? "He'd then have to forego the accrued benefit plus the potential future appreciation," notes Mr Ranganathan. "ESOP may act like a golden handcuff."

In a bear hug, though, such as what's on, fresh ESOPs may not appear attractive. And options already granted may have shed too much value to retain their power as handcuffs.

More Stories on : ESOPs | Human Resources

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