Equity Grants Will Need a New Plan

Companies need to consider their performance and stock market uncertainty while choosing

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For most Indian companies, the equity grants come at the end of the fiscal year after the annual performance of the organisation and evaluation of executives. With challenges posed by coronavirus along with other factors, such as oil prices (down by about 66 per cent in past one year) and depreciation of rupee, stock prices across industry clusters have reacted sharply to the uncertainty. The key indices are down 15-50 per cent from April 2019 levels.

In these circumstances, how should the Nomination and Remuneration Committees approach equity grants?

There are broadly two types of grant structures that exist for companies that do this annually or have a grant cycle of more than one year. Given the present situation, these grant cycles might have to be treated somewhat differently.

If the companies have an annual grant structure and the cycle is coming up, the following are some alternatives:

Grant as planned: If the equity compensation plan has been implemented to ensure that executives swim with shareholders, the shareholders should be okay with honouring the compensation commitment.

Use three-six-month average share price: This perhaps can be used if the assessment is that the industry and the company will revive in the near term (3-6 months) and there is a concern that executives may be overtly rewarded in the case of recovery. For companies that use stock options, the exercise price could be the average of past 3-6 months (premium priced options). For companies that use full value instruments, such as Restricted Stock Units (RSUs), the number of RSUs granted could be calculated based on 3-6-month average share price. If the recovery doesn't happen, appropriate add-ons can be considered.

Wait and watch: Make the equity grants later in the year. If things improve, the grant size should not get impacted materially. If the environment doesn't improve, the approach discussed above can be considered. To make up for the delay, the vesting schedule can be slightly accelerated, for instance, if the vesting schedule is 30-30-40, it could be 33-33-34 for this particular grant.

If the company has a one-time grant structure, then the following options could be considered.

If the grants are recent, irrespective of the nature of instrument (options, RSUs, performance shares) the wait-and-watch approach is probably the best. For historical grants, especially where the vesting was subject to performance and the performance period is approaching an end, there could be a challenge. If the performance conditions were based on aspects such as total shareholder return or market capitalisation/share price increase, the remuneration committee can potentially revisit the averaging period at the end of performance period and use an average based on longer period, i.e., for companies already using a 3-month average of closing price, a 6-month average can be used. For those with no averaging, a 3-6-month average can be considered. If the performance conditions were internal (related to P&L, balance sheet, cash flow, etc.), the committee may have to apply discretion. Alternatives such as extending the performance measurement period itself, adjusting the past quarter performance, extrapolating the past three-quarter performance with suitable adjustments can be considered.

A New Price?

Re-pricing stock options is generally not acceptable to shareholders. But these are unprecedented times. Repricing may be considered only if there has been a sharp decline in share price, which in committee's view, is largely beyond the control of management and the expiry period of options is approaching. If there is some time left for options to expire, the committee could wait and see if there is recovery over the next few quarters.

A fine balance has to be achieved to ensure that the larger stakeholder community views the compensation practices in a positive manner, while the purpose of having an equity-based plan is met.

The author is Director, Deloitte India