Forbes India: Two different ways of making ESOPs work

PIONEERING CHANGE: Axis bank was one of the earliest in the banking sector to experiment with ESOPs.

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Axis Bank

UTI Bank, which changed its name to Axis Bank in 2007, was one of the earliest in the banking sector to experiment with employee stock options. It launched a scheme as early as 2001, starting with the unreserved objective of covering all employees, based on performance.

Over the years, the scheme has undergone changes, teaching the bank an important lesson: Not everybody in the organisation wants ESOPs and even for those who do, the current market price is an important consideration.

When Axis Bank first designed the Employee Stock Ownership Plan (ESOP) scheme, there was much debate about how broad-based it should be, says Snehomoy Bhattacharya, president of human resources.

The bank chose to include all employees except the poorest performers.

“In surveys, we were below our competitors on cash performance bonuses. Also, we did not have an aggressive variable pay plan. So, we decided ESOPs would be a good way to compensate employees, even at lower levels,” he says.

At first, employees didn’t take well to the new plan.

Only when the stock price started climbing, they saw the point and embraced the scheme.

The first major change came in 2004.

Axis Bank had been accounting the difference between the price at which options were granted and the prevailing market price as an expenditure on the books. “We noticed we were taking a hit,” says Bhattacharya. So, the company changed the formula for pricing the options.

It switched from the 52-week average to the previous day’s close as the basis for the grant price. This helped the company eliminate its accounting expenditure, and also wiped out the arbitrage the employees enjoyed between the two prices.

The next year dealt a bigger blow to ESOPs. The government brought them under the ambit of fringe benefit tax (FBT). Any difference between the fair market value and the vesting price came to be taxed at 33.99 per cent. The industry was enraged at what it saw as an unfair levy, but the government did not budge.