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Do Employees understand Stock Options ?
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Companies in India have recently discovered stock options as a powerful tool for attracting and retaining talent. Though, not a new concept, stock options have assumed importance thanks to the booming Indian economy. Employee stock options were given out by companies in India in different ways. This article examines the concept of employee stock options and assess the level of understanding one has about it.

Stock Options
Stock option is a unique way of engaging the employee at a higher level. The person who was hitherto an employee in the organization with a fixed salary and a small bonus, now becomes a part in the success (and failure) of the company. Giving stock options to employees mean giving them a share in the company’s future. Generally, stock option is an umbrella term that is used for encouraging employees to become company shareholders. Stock options manifest in different ways viz. Stock options, RSUs, Stock Purchase Plan. Stock options are stock grants given to employees at a fair market value. The employee has an option of purchasing the same at a later date. The benefit is based on the assumption that, at a later date, the stock price would have augmented significantly. Thus the employee gets the benefit of buying company stocks at a much lower than market price. RSUs or Restricted Stock Units are company shares given to employees at close to face value, whereas, in a Stock Purchase Plan, the company gives (or arranges for) a loan to the employees to buy company shares at small discount compared to current market price.


The organizations perceive it as a powerful tool to attract and retain talent. A pre-IPO company that gives stock options to its employees expect them to stay with the company at least till the IPO time. In reality, employees often do stay back with companies much beyond its IPO. In a pre-IPO company, stock options are seen as an effective tool to motivate employees to put in long hours of hard work. Thus, stock options help in making the employees feel a part of the company. Indian high-tech companies see it as a way by which they can offset the high salaries offered by the MNCs.

In the initial days of the IT industry, the expectation from stock options was not significant. The employees saw it mainly as a possibility of making money at a future date. However, the IT boom in India that made many IT employees millionaires overnight saw a transformation in the way the employees perceived stock options. Today the employees see it as a quick way to get rich and a way to grow their income in an exponential manner. In companies which have had more or less stable share prices, such as Infosys and Wipro, employees perceive RSUs and stock options as equivalent of compensation. Today, it is common for the employees to demand for stock options more than for a high raise. Thus clearly, the Indian employees have understood the stock options to some extent. However, since most of the Indian IT companies have seen only a growth phase, it would be interesting to study the reaction of the employees during a down turn. Since the goal of stock options is to make employees part of the company’s fortunes and misfortunes, it would be interesting to see a motivated set of employees turning around a poorly performing company.

Stock options are a powerful tool; it made employees of companies such as Infosys, Mindtree, etc. millionaires. But, if the employees do not understand the tool well, it might not be as effective as was the original intention.

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