ESOP’S – A well known term for Private sector Banks vis a vis an Alien for Public Sector Banks

With the human resource being one of the key driving asset for any organizations success, rewarding the same with the adequate benefits for the hard work done also becomes incumbent for the Organization. Employee stock options have been one of the most popular forms of part of the compensation strategy used by the Companies to reward their employees all over the world.The concept has not been a very new term for the Indian Companies  also and is being in the practice since early 90’s when IT Companies started using ESOP’s. Companies have always believed that it is their employees only who contributes the most in the success of the Company and therefore must be given a chance to share a part of its revenue. Though the concept of employee stock options was firstly introduced by the IT Industry in India, The BFSI Sector, NBFCs , companies engaged in micro finance and insurance companies have also shown keen interest in these. Even the leading private banks in India have been awarding their employees with such stock option since a long time.  Employee stock options are a type of benefit plan implemented by the companies under which the employees of the Company are given an opportunity to become the owner of the Company by acquiring a certain stake in the share capital of the Company. Under the employee stock option schemes, employees are granted a certain number of options based upon the criteria decided by their Company which in mostly cases is linked to the performance of the employee. Employee stock options have proved to be the most robust and effective way of aligning the interest of the Company with that of its employees by giving them a chance to share the profits of the Company and ultimately resulting in wealth creation in the long term.

ESOP’s in private sector Banks 

Private sector banks In India at a very early stage understood the need of transition of a part of ownership from the Management to the employees and aligning their interest with that of the Bank and therefore have been issuing employee stock options since last fifteen to sixteen years. ESOP’s in private sector Banks has always been a very important part of their Compensation strategy and Banks in past have diluted a good reasonable part of their stake in the share capital to their employees. Most of the Private Banks whether it be Axis bank or HDFC Bank or ICICI Bank have been implementing various employee stock option schemes in the past many years  under which the employee stock options issued to the employees forms a part of their variable pay linked with their yearly performance. Issuance of Employee Stock options has helped the Banks in strategizing their employer employee relationship and has made a substantial contribution to their growth and helped them in retaining their employees.

The benefit of implementing the employee stock option schemes in the Banks is also clearly evident from the fact that out of the 44 Banks listed on the Stock exchange, 18 are the private sector banks and 90% of which are already having employee stock option schemes. Few such banks are ICICI Bank, HDFC Bank, YES Bank, Axis Bank, Indusind Bank, Kotak Mahindra, Karnataka Bank,City union Bank, Federal Bank, South Indian Bank.

These employee stock options have also helped such banks in rewarding their employees well, keeping their motivation level high and rewarding with greater number of stock options to the employees who have  exceptionally contributed to the banks success .

A tabular illustration of the various schemes implemented by some of the leading Private sector banks has been given below:

*Data obtained from the publically available information 

Situation in Public Sector Banks:

Employee stock options still appear to be an alien term when it comes to the public sector Banks. Till now, none of the Public sector banks in India has implemented the Employee stock options and can be said that Public sector banks are still lagging behind to a great extent from the Private sector Banks in this area. Earlier also many proposals for issuing stock options to the employees of public sector banks have been considered but none of the plan took a concrete form due to constant increase in the rate of loans given by such banks turning into default. One more factor which had acted as a constraintin implementing employee stock options in public sector banks was their low stock prices in the market which renders their shares unattractive to the investors.But in the recent year’s prices have improved making it an attractive for the employees to purchase the stock of their own Banks and therefore Ministry of Finance is again looking for ESOP’s as a way out. 

 A ray of hope was seen when in August 2015, Government announced to introduce ESOPs for the employees of Public sector Banks but soon the discussion ran into bad weather as the same has not been still implemented. Discussions regarding as to what amount of profits earned by banks can be distributed as employee stock options was also in consideration. However after a time of approx almost 2 years , Finance Ministry has finally accorded its consent to issue ESOP’s in public sector banks which will prove to be a big motivational factor for the Employees of the public sector banks who have been deprived of such benefit for more than a decade when compared with their peer private banks in the industry.

Also, if we look at the pay scale and benefits provided to the top level management in a public sector and a private sector bank, situation appears to be worse, since the employees of the latter are receiving more of the remuneration linked with the performance as compared with that of private sector banks. There can also be seen a big difference in the approach of the public and the private sector while formulating their pay packages as most of the private sector banks link their pay packages to the performance criteria of the employee while the public sector Banks tends to keep the pay structured fixed. The chief of the Banks Board Bureau, Mr. Vinod Rai , also in his statement said that the variable part of the compensation structure for public sector banks can be improved by issuing employee stock options, Bonuses and other performance linked benefits.

If Sources are to be believed, only those Banks in the public sector will be allowed to issue employee stock options which in the recent past have earned substantial profits and have successfully administered the Non- performing assets. So it again prove to be a motivating factor to reduce the NPAs of the Bank, but on the other hand the Ministry should not make it foremost requirement for launching of ESOPs. 

Mr. Raghuram Rajan, Governor of RBI , also in his statement said  ‘’With public sector banks shares trading at such low levels, a small allocation to employees today may be a strong source of motivation, and can be a large source of wealth as performance improves’’.

Conclusion:

There stands no doubt that issuance of employee stock options by the Private sector Banks have resulted in establishing a strong relationship between the management and its employees and thereby helping the Banks in retaining their talented and experienced employees for a longer period of time and ultimately resulting in dual benefits i.e Contribution to the Banks overall performance and wealth creation for the employee in the long term.  With the banking industry getting more competitive day by day with the entry of new players, it is high time that public sector Banks must take each and every necessary step for retaining and keeping their employees especially the senior level management satisfied. Hence in such a condition, the issuance of employee stock options would act like a life savior for the Public sector Banks.

Therefore, the in-principle nod given by the MOF in the month of March, 2017 to employee stock options in Public sector Banks is surely a welcome step and soon an early action is expected by the end of this year itself to implement the same.