MFs dangle ESOPs carrot to retain top talent ahead of stock market listings

Asset management companies (AMCs) are dangling employee stock option plans (ESOP) in a bid to hold on to key talent as the industry gears up for the next phase of growth and large players look to list on the bourses. 

While several asset management companies (AMCs) such as Reliance MF and HDFC MF already had ESOP structures in place, others like SBI MF doled out the benefit to their employees for the first time this year, sources said, adding that smaller fund houses might follow suit. 

Indeed, as fund houses grow in scale and gear up to list, doling out ESOPs may become the norm rather than the exception, believe experts. 

HDFC MF gave additional ESOPs to its key staff a few months ago, with Chief Executive Milind Barve and Chief Investment Officer Prashant Jain receiving 130,000 and 40,000 options, respectively. Estimates suggest ESOPs given over the past few years to eight key employees of HDFC MF could be valued at Rs 50-60 billion, assuming an issue price of Rs 1,300-1,500 when the AMC lists on the bourses.  

Similarly, Reliance Nippon Life Asset Management’s shareholders approved 'ESOP 2017' to reward existing employees and to attract, retain and motivate key talents. ESOP 2017 envisages granting an aggregate of 23.5 million options, and each holder, the right to be allotted one equity share, upon payment of the exercise price. The fund house listed in November last year.

“We have given ESOPs to our key leadership team and middle management and are gradually increasing the employees covered under the scheme. ESOPs add to the stability of the company and help align the interests of all stakeholders,” said Sundeep Sikka, CEO, Reliance Nippon Life Asset Management .

The biggest challenge facing the industry today is talent retention. The equity market has seen a sustained uptick in the past few years and asset management companies’ profits have soared, giving them enough firepower to poach fund managers. 

Equity CIOs Gopal Agrawal and Anup Maheshwari recently quit Tata MF and DSP BlackRock Investment Managers, respectively. Earlier this year, Sunil Singhania quit Reliance Capital as global head of equities to set up Abakkus Asset Manager, an investment management company. In July last year, ICICI Prudential MF deputy CIO Manish Gunwani quit to join Reliance MF.

“Since the MF business is all about people, stability at the top is important and is looked upon favourably by shareholders and distributors,” said a senior fund official on condition of anonymity. “ESOPs can also reduce the impact on the balance sheet as the money does not directly flow out of the P&L account,” he added.

Companies typically give out 60-100 per cent of cash compensation as ESOPs at CXO levels. In certain cases, the percentage of stocks can range from 100-200 per cent of cash compensation depending on the lifecycle and evolution of the business.

“ESOPs have become a significant exit barrier for key executives,” said Reet Bhambhani, partner, EMA Partners Executive Search. “Over the years businesses have loosened their purse strings in the form of ESOPs and deferred compensation to attract and retain critical talent.”

According to sources, IDFC MF, too, has granted ESOPs to its key employees ahead of a possible stake sale. “The organisation has a comprehensive plan to reward and incentivise its employees to enable the strategic imperative of sustained value creation. ESOPs are an appropriate mode to achieve its stated purpose. ESOPs were granted last year and have created a sense of ownership and enhanced performance,” said IDFC AMC in an emailed response.  

Mutual funds have garnered record assets in the past year, with an average monthly inflow of Rs 40 billion to Rs 60 billion through systematic investment plans. The industry has doubled its assets in the past three years, with overall AUM totalling over Rs 22 trillion as of 31 May 2018.

Options galore

• Faster growth, exodus of talent and listing opportunities key drivers
• Fund houses give out 60-100 per cent of cash compensation as ESOPs at CXO levels
• Percentage of stocks can reach 100-200 per cent of cash compensation
• SBI MF has created an ESOP structure for first time
• IDFC MF has granted ESOPs to key employees ahead of a possible -stake sale
• MF industry has doubled its assets in past three years to Rs 22 trillion