Incentivising has become the order of the day for service based industries. What’s interesting is by using big terms like ESOPs, companies have gained the loyalties and have rewarded the high performers. But wait, that was some time ago when IT industry was at its nascent stage. A decade since the good old days, we know that ESOPs are only for the higher management, whose actions have a larger impact on the performance of the company. The ones at the bottom of the pyramid either know nothing about it, or look at esops as a kind of affiliation.
But that appears to be a thing of the past. Its 2011, and we hear IBM offering $1000 employee stock options to its Indian employees who have been with the company in 2010. This is quite a unique way of providing incentives to the 1.28 lakh employees. A massive exercise, and IBM claims that Armonk would like of ‘share’ some of its pie with the people who make things happen.
It’s all rosy and IBMers must cheer their hearts out, right? The sceptic in me asks to do a reality check. And here’s what I find.
So a $1000 option is being offered. In the at the money situation, an employee will get 7 or 8 options, considering $159 as the closing price last Friday, when the announcement was made. Now the exercise period of the ESOPs end in 2015. It means that one needs to be with the company now and in 2015 to be eligible for this incentive.
For the employee, the long period of 2010 to 2015 will offer, besides long term opportunities abroad, the snob value of being showered with options.
Some financial analysis on this:
Let’s assume one gets 8 options at an exercise price of $160. The current regulations would not allow holding shares of a foreign company, so it will be sold. In case the price of the scrip reaches $400 in 2015, selling the option would mean making 400 – 160 = $240 per option, which would roughly translate to 240 x 45 x 8 = 86,400 INR (assuming USD/INR exchange rate is 45 then). But that’s not all; it will be subject to personal income tax, which would wipe away a significant portion.
Now it’s nice to assume a 2.5 times increase in share price in the next 4 years. So getting a bit more realistic yet optimistic let’s target the price to about $300. A recalculation would mean 50,400 INR pre tax. Isn’t it smaller than the annual bonuses for most of the IBMers?
The current trend in India has been to provide increment at sub-inflation rates. And cost cutting by making beverages payable doesn’t help either. At this stage, the company must do something to motivate their staff. Such sham in the name of long term benefits would only please those who have little alternatives outside the organization.
So much for incentives! Will it check attrition? You bet!