Share-based payments are a well-established mechanism for rewarding and retaining employees. With the advent of the information technology sector in India in the 1990s, almost all the major companies such as Wipro and Infosys began issuing Employee Stock Option Plans (ESOPs).
An ESOP grants an employee the right (but not the obligation) to purchase a stipulated quantity of the company’s shares at a stated price for a set period of time. Initially the grants contained service conditions such as a minimum period of continued employment before the options were vested. Later, as the markets evolved, performance-based conditions such as achieving specified year-on-year revenue growth were frequently introduced.
ESOPs are beneficial only when the stock price increases in value. Let’s say that in 1999, Company A grants an employee 1,000 ESOPs with a strike price of Rs 100 and a vesting condition of three years of continuous employment. In 2002, when the ESOP vests, the share price is Rs 80. The employee gets no benefit as the strike price is higher than the actual share price.
During the 2000s, Indian employees in general held the belief that ‘cash is king’, which was reinforced by a number of factors — beginning with the technology sector’s crash in early-2001. Further, the introduction of Fringe Benefit Tax (FBT) saw many employers attempting to recover the tax liability from employees, as allowed by the Government. Increased volatility in stock markets after the financial crises in 2008 made employees more reluctant to accept ESOPs as compensation.
Recently, there has been a growing trend of rewarding employees with Restricted Stock Units/ shares (RSUs). Conceptually, RSUs resemble stock options, but they differ in some key aspects. Restricted Stock Units represent an unsecured promise by the employer to grant an employee a set number of shares (at zero strike price) on completion of the vesting schedule or other conditions.
For example, in 2010 Company B grants an employee 1,000 restricted stock units with the vesting condition of three years of continuous employment. In 2013, if the service conditions are met, the employee obtains the 1,000 shares. Here the employee benefits irrespective of the share price movement. If the share price is Rs 80, the employee gets a reward of Rs 80,000 (Rs 80 x 1,000 shares); and if the share price is Rs 120, the employee gets Rs 1.2 lakh.
In 2011, Infosys announced an RSU scheme of Rs 656 crore for its employees. Other corporates such as Wipro followed the lead and announced large-scale RSU schemes for their employees.
Restricted Stock Units seem to be a useful tool to motivate staff to participate in the company’s growth story. Employees benefit, as they are assured of some form of reward even if the company’s stock price declines. As RSUs gain greater acceptance among Indian corporates and their employees, we can expect to see more of them.
From a financial reporting perspective, the accounting for ESOPs and RSUs are similar. However, there is a divergence in standards for share-based payment accounting between Indian and global norms such as International Financial Reporting Standards (IFRS). For equity-settled share-based payments, IFRS mandates measurement of the award granted at fair value with recognition over the vesting period. In contrast, Indian accounting rules permit the measurement of the awards at intrinsic value or at fair value with recognition over the vesting period.
(The author is Director, Assurance, Grant Thornton India LLP)