Employee Stock Options often look good on paper. But when markets turn turtle, company executives who are given a substantial stock-based compensation tend to lose out.
But what if the stock options are ‘re-priced’ significantly to make them attractive?
Idea Cellular has done precisely that while compensating its Managing Director, Himanshu Kapania, in 2011-12.
He was allotted stock options in 2007 and 2008, and the exercise prices for both of these tranches have been reduced to highly attractive levels.
In December 2007, Kapania was given 267,500 stock options at Rs 112.57, while in July 2008 he got 66,875 options at an exercise price of Rs 84.03.
With Idea Cellular’s stock price having fallen heavily from its 2007-08 levels, the pricing for the options given in 2007 has been reset to Rs 39.3, while that awarded in 2008 would now be priced at Rs 45.55. The exercise price of both these options is at a substantial discount to its current market price of Rs 74.75.
Kapania has already exercised 51,700 options under the first tranche.
He stands to make around Rs 2 crore from the 2007 options, if he were to exercise them and sell all of it at the current market price, while his costs would be a little over Rs 1 crore. From the second tranche, his proceeds would be about Rs 50 lakh, while the costs would be Rs 30 lakh.