Non-Equity Incentive Plans
It is rightly said that inculcating a feeling among the Employees that management is not just concerned about their value addition to the organization but is very well concerned in accretion of their personal wealth, would not just create a sense of belongingness among Employees but would enhance their overall productivity. Besides cash rewards, it is important for any organization to make its employees believe that their personal growth is linked to the growth of the organization. Employee Stock Option Plans /Equity Incentive Plans (commonly referred to as ESOPs) are one of the most important tools to attract, encourage and retain Employees.
Long-term growth potential of a business is directly proportional as to how well it is able to maintain a balance between satisfaction of its employees and preservation of its assets and financial resources. Generally, the Companies opt for one or more modes with some permutation & combination to align it with the needs & objectives of its business with the sole intent to incentivize the valuable asset of their business i.e. Employees for their association and performance.
There are basically two broad divisions of restructuring modes:
- Stock Options
- Stock Indexed Plans
Stock Indexed Plans (also referred as stock based incentive plans) do not involve actual acquisition of shares and thus does not involve dilution of promoters’ stake. These SIPs are the cashless modes available ESOPs. Such SIPs can be structured in any of the following 2 modes:
(a). Stock Appreciation Rights (SARs):
SARs are not technically employee stock options, companies often use them in a like manner. 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.
(b). 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. It simulates the Company shares in everything except that does not represent true ownership. The Company simply credits these phantom shares on its books and as the value of the company shares rises and falls, so does the value of the phantom stock. Read a detailed article on phantom stocks below:
Hence, SARs/Phantom Stocks are the two non-equity based modes available under ESOPs, under which the employees are allotted notional units at a pre-determined price. On completion of vesting conditions, the employee is paid cash equivalent of the net gain i.e. appreciation in the price of underlying shares without any cash investment. These plans generally result in cash outﬂow for the company.