Take Companies Act beyond ESOPs fables

Earlier this month, Nirmala Sitharaman introduced fresh amendments to the Companies Act, which, among other matters, recognise new instruments for executive compensation. This is much welcome. The company law is being refined to add esoteric varieties of sweat equity. These perform the same function as employee stock options, with a twist. Employers issue Esops to align employee and shareholder interests. If an employee stays long enough and the company's shares climb, the argument runs, everybody is happy. But it doesn't work that way all the time. Share prices are volatile, and employees could be disappointed when their shares are vested. Then there are limits to how much equity a company can divvy up among its employees without diluting control. That's where restricted stock units and stock appreciation rights come in handy.

Unlike Esops, employees don't need to 'buy' restricted stock units. These are granted by a company at the end of a period, and the employee does benefit every time so long as the shares are worth something. Stock appreciation rights is simply a cash or equity bonus of the share price delta. These are improvements over the vanilla Esop - where the employee bears some risk - and are taxed accordingly. The further these instruments move away from employers and employees sharing business risk, the closer they move towards being income, and will be taxed as such in the new company law that is undergoing parliamentary scrutiny.

Which raises the question about the purpose they serve beyond companies locking in talent. Employers prefer refined versions of sweat equity because they don't have to worry about diluting equity. There is also no 'cost' to these exercises, which makes them less risky. Accounting requirements for restricted stock units and stock appreciation rights are less demanding. Which is why companies prefer them. The law is evolving with corporate tastes on employee compensation. It's an admission that companies and their staff need fancier ways of ensuring everyone puts their weight behind the wheel.