Share Grant Plan vs Employee Share Option Scheme

The Share Grant Plan (SGP) is catching on with Malaysian companies to attract, incentivise, motivate and retain employees; in addition to or replacing expired Employee Share Option Schemes (ESOS), or as a fresh equity plan.

What are SGP and ESOS? In an SGP, free shares are allocated to employees who have achieved identified performance targets by given deadlines, contingent on the company’s expectation of the employees.

In general, as the employment period progresses, more shares become vested; shares would have to be held for a defined period after vesting, and possibly with other restrictions, depending on the vesting details.

In an ESOS, employees may buy (no obligation) allotted shares during predetermined periods at predetermined prices, with no link to performance. The objective here is that employees contribute to long term corporate earnings and objectives, and are expected to gain from share price increases.

Employees forfeit the grant or option if their employment is terminated or when they part company prematurely. A committee comprising a majority of independent directors recommends to the Board the share allocation and vesting to executives, and by grade/band to other employees.

What if an employee fails to meet performance targets in an SGP? In Malaysia, the laws on termination of an employment contract without just cause are currently biased towards the employee. Contracts with termination clauses premised on deliverables may not be attractive as it signals employment uncertainty and insecurity; alternatively, talent costs may be significant. In an ESOS unless employees have ready cash or a finance plan to buy shares, and the share ownership is worthwhile, options would not be exercised. Share liquidation is costly if share prices drop subsequently, and servicing the interest in a finance plan may be burdensome!

An effective SGP would require a rigorous Human Resource plan that can convert corporate objectives into business/operational performance targets. It should also require detailed monitoring, an appraisal mechanism with measurable outcomes as well as the ability to carry out performance reporting. If this process fails on grounds such as integrity, objectivity, transparency and reasonableness, then the grant may be counterproductive. Qualitative deliverables are not easy to measure either. Board appraisals of executives should be transparent and detailed disclosures made in Annual Reports of PLCs. Exercised and unexercised options in ESOS are currently disclosed. Clarity in vesting details is essential for investors’ understanding.

In a vibrant economy, companies are hungry for good skills and the talent search may be a challenge. Here, it is unclear if equity plans are good incentives, as an SGP has a “short term” attribute. An employment contract with an SGP is somewhat synonymous with an outsourced contract if employees leave after vesting of the grant, or if deliverables are not met. Loyalty and delivery promises cannot be taken for granted!

Corporate culture, morale, job satisfaction, career advancement and remuneration packages require continuous attention with or without equity plans. Performance bonuses/cash plans, profit sharing opportunities, competitive remuneration packages benchmarked to industry and other standards, and an enviable working environment are fundamental to retention, employee satisfaction, corporate growth and profitability.

Understand what keeps respective employees charged at different cycles of their career and age, their differing needs and aspirations, and the costs of attracting specific talent. SGP and ESOS are merely variations of the remuneration packages. When faced with falling share prices, lost opportunities during the vesting period and the fact that more companies are catching on with SGP and ESOS, it will appear that these equity plans may look less workable and that more innovative schemes may emerge instead!

Despite the benefits of a good equity plan however, there are setbacks to its success. Equity plans for one, result in share dilution. Further, you need to craft appropriate terms of reference for the vehicle/trust/committee and recognise that the costs in managing these equity plans can be pretty significant. There are also many factors that need to be considered in any equity plan including a review of the existing employees’ demographic factors and skill sets, the corporate financial indicators and performance as well as the issue of share liquidity. One also needs to consider how potential corporate exercises such as mergers, privatisation exercises, takeovers, new business strategies as well as possible corporate abuse impact on these plans.

Vijayam Nadarajah is now a freelance analyst on corporate governance (CG) and financial matters.In this role she assists companies to embrace best corporate practices, highlight weaknesses in governance, internal audit and risk management practices.

She also trains in finance, risk, internal audit corporate governance and insurance matters.Previously she worked as a financial controller and in other roles in financial institutions. Vijayam is a past president of the Institute of Internal Auditors Malaysia.

This article first appeared in the July 2011 issue of HR Matters Magazine. Copyright HR Matters Magazine. All rights reserved. No part of these article, either text or image may be used or reproduced with express written permission from HR Matters Magazine. For copies of this article, to link online or to order reprints, please contact editor@hr-matters.info. For more info, please visit http://www.hr-matters.info.