Modes Available For Structuring Stock Based Incentives
One of the basic fundamental for contemplating the idea to roll-out any incentive plan is to ensure the attractiveness of the Plan from the perspective of the Employees. Corporate Houses have substantial flexibility to frame the plans catering to their needs as well as to the needs of the Employees. Generally, the Companies opt for one or more of the following modes with some permutation & combination to align it with the needs & objectives of its business:
(a) Employee Stock Option Schemes (ESOS):
Employee Stock Option Schemes are one of the contemporary and most popular mode of rewarding Employees. ESOS are generally offered by offering fresh equity resulting in dilution of Promoters’ stake and an alteration in the company equity structure.
(b) Employee Stock Purchase Plan (ESPP):
Employee Stock Purchase Plans allow Employee to purchase Company’s shares, often at a discount from Fair Market Value. The terms of the Plan determines the tenure and price for possession of the Company’s shares by the Employees. Usually, ESPPs are being framed for offering shares as a part of public issues.
(c) Restricted Stock Award (RSA):
Under such incentive plans, the Employee is awarded with the shares subject to fulfilment of certain underlying conditions. If the said underlying conditions are not fulfilled then the awarded shares stand withdrawn.
(d) Restricted Stock Units (RSUs):
Under Restricted Stock Units Plan, an Employee is awarded with the right to receive shares on a pre-determined date subject to occurrence of a specified event or fulfillment of specified conditions.
(e) Stock Appreciation Rights (SARs):
SARs provide employees with cash payments equal to the appreciation of the company’s stock over a specified duration. Thus, unlike other options, SARs provide employees with equity upside without exposure to any downside.
(f) Phantom Stocks:
Phantom stock is a form of long-term deferred compensation using the Company shares as the measuring device for calculating the value of the deferred compensation.