Managing employee benefits

Employee benefits have a significant financial and administrative impact on business

International human resource practices are firmly getting established in India. Employee benefits in the form of employee stock options are commonly used as an incentive. Multinational companies also provide such incentives to their employees worldwide.

The Indian corporate sector has recognized the need of having a comprehensive staff policy and procedure manuals that contain policies on wide ranging issues including non-discrimination, code of conduct for the employees, strict regulations on insider trading, confidentiality, protection of the employer’s intellectual property, to name a few.

The corporate sector needs to comply with Indian labor law issues such as payment of bonus, super-annuation benefits, payment of salary in the event of immediate termination. Obligations under tax laws for deducting taxes on perquisites and salaries paid to employees and compliance with foreign exchange regulations are other issues that require compliance.

Daksha Baxi of Nishithdesai Associates, a renowned HR Law Consultant in Mumbai, feels that the disclosure of compensation to the management and employees of a company has assumed significance due to the recent developments in the global business scenario. The collapse of giants such as Enron, WorldCom and the brewing troubles at other corporations in the US which appeared invincible, has brought issues relating to accounting and corporate governance into prominence.

The emphasis today is on transparency and disclosure of decisions and actions that will impact the financial statements of a company, and hence have a bearing on the investment decisions of the shareholders. Disclosure in relation to compensation to the management and employees of a company assumes significance in this context. Stock options as a means of compensating employees have been used extensively by companies over the last couple of decades, she adds.

Employees stand to gain immensely when the share prices soar on the bourses. Employees, especially executives, CEOs, CFOs et al are privy to inside information and are involved in the day-to-day operations of the company. Stock options to such employees provide incentive for their complicity in manipulation in compilation and presentation of financial data resulting in inflated stock prices, Baxi opines.

To the extent that stock options are a form of employee compensation and are not reflected in the books as such, the profits of the company are exaggerated. This gives an untrue picture of the true cost of employees to the company, she adds.

Nearer home, in India, the issue of ESOPs by listed companies is regulated by the guidelines issued by the Securities and Exchange Board of India.

The disclosures and the compliance requirements under these guidelines are quite elaborate. SEBI requires complete disclosure with respect to the options granted, including the pricing formula, options vested, options exercised, the number of shares arising as a result of the exercise of options, options lapsed, variation of terms of options, money realized by exercise of options, the employee-wise details of the options granted and the diluted earnings per share pursuant to the issue of shares on the exercise of the option calculated in accordance with the International Accounting Standard 33, she says.

However, there is no provision in the SEBI guidelines for ensuring the enforceability of these guidelines. Similarly, there are no transition provisions for unlisted companies that have issued ESOPs prior to listing.

The Sarbanes-Oxley Act, which was enacted to usher better corporate governance requires the certification of financial reports by CEOs and CFOs. A similar provision already exists, in terms of the Directors’ Responsibility Statement to be included in the Board’s report under Section 217(2AA) of the Companies Act, 1956 (the Act).

The ICAI is yet to bring out a standard for expensing stock options. India already has a strong framework to ensure better corporate governance in terms of various requirements under the Act and the listing agreement. “We need to build on this advantage by quickly laying down standards for expensing of stock options for listed as well as unlisted companies”, she says.

Issue BG27 June03