Post-Satyam saga, sops lose attractiveness

ne January 9, 2009, 0:43 IST

With the uncertainties in the stock market, furthered by instances such as the Satyam fraud, the employees’ stock option programme, which has been used as a crucial tool to attract and retain talent, appears to have lost its charm.

On Wednesday, the employees of Satyam lost close to Rs 221 crore after investors dumped the stock. At the end of the September quarter, Satyam employees were holding 15.9 million employee stock options (Esops).

The unfortunate drubbing of the Satyam stock has raised serious questions about the attractiveness of the stocks held by the employees, which may be affected by any ‘uncalled for’ action by the company.

A large number of mid-level staffers at Satyam had opted for Esops and are now feeling the heat. Those who maintained their shares will now be forced to sell them off at a minimal price. “Even if some other company buys Satyam, those who hold Esops will not be benefited. Hence, this group will be one of the worst-hit,” said a project manager, who herself had opted for Esops.

Another top level executive said that almost 40 per cent of the old employees at Satyam have opted for Esops, considered to be an excellent investment and growth option.

“The company management last week had asked employees not to worry as the company was doing well. Hence, most of the staffers decided to hold on to the shares. But Wednesday’s developments caused heavy financial losses,” the executive said.

Meanwhile, many tier-I IT firms have re-framed their Esop programme while a few others have suspended it. IT major Infosys Technologies had stopped the stock option for the employees almost four years ago, realising that it may not be that lucrative for the employees due to the market volatility and the long lock-in period till they can encash it. So, the company now rewards its employees cash in the form of variables.

“Stock makes sense in the initial phase when the company is small. But when the market is volatile, employees don’t prefer stock option, but cash. We conducted an internal survey among our employees and based on the outcome, we decided to stop giving stock options,” said V Balakrishnan, CFO, Infosys.

Though Wipro continues to give stock option to employees, it offers them in a different format in what the company terms as ‘Restricted Stock Option (RSU)’. The company offers RSUs to select employees as a part of the Wipro Employees’ Rewards Programme (WERP). This is decided based on various parameters including performance and how critical the resource is for the organisation. The company offers the RSUs to the employees at the face value of the stock plus the fringe benefit tax (FBT) on the face value.

Industry sources say that in this scenario, where the stock prices of most IT firms have fallen by almost half in the last couple of months, the Esops programme is losing sheen. Besides, the global financial meltdown and the easy availability of human resources has brought down the natural attrition in any company significantly.

“There is hardly any demand for employees’ stock option in today’s environment,” said industry sources. A senior official of Wipro Technologies added, “Given the downturn in the job market, nobody is hiring and more people are available to you than before. Employees’ stock option is a good tool when the demand is high.”

Usually, publicly-traded companies offer esops based on the average trading prices of shares for a specified period of time. This is the prime reason why not many employees are interested in the stock options. However, in case of companies that are yet to go public, but have framed up definite plans for the same in the near future, esops still continue to be promising.