A REPORT recently released by the Securities and Exchange Commission of Pakistan mentions that during FY15, the chief regulator approved the Employees Stock Option Scheme of Treet Corporation Limited.

While the report does not say so, given the historic trend, Employees Stock Options and Ownership Schemes (ESOS) have received scant interest in the country’s corporate sector, despite many of their advantages. A lone ESOS here and there comes to light each year.

Basically, a stock option involves a firm giving its employees the right to buy a specified number of shares in their own company at an agreed price, which is usually lower than the market price of the stock. The option has to be exercised by a specific date. The employee, however, is under no obligation to purchase all or part of the number of shares allotted in the option.

“A major advantage for the companies that opt to share ownership with their staff is that they are able to retain dedicated employees who put in greater effort. And the staffers’ benefits also get tied to the performance of the company,” explains a corporate lawyer.

The most celebrated Employees Stock Option and Ownership Plan (ESOP) — not to be confused with an ESOS — in the country took place in 1991, when energy giant Exxon decided to part with its fertiliser business globally. The employees of Exxon Chemical Pakistan Ltd, in partnership with various financial institutions, bought out 75pc shares of the company. That company then turned to Engro Chemical Pakistan Ltd and became one of the blue chip companies in the local corporate sector.

“This was at that time, and perhaps still, the most successful employee buyout in the corporate history of Pakistan,” recalls a veteran.

Stock option from a company’s capital increases the number of paid-up shares and dilutes the firm’s stock price. This does not find favour with the company’s existing shareholders

The ESOSs are governed by the SECP under the ‘Public Companies (Employees Stock Option Scheme) Rule 2001’. In order to offer the scheme, the company’s shareholders first need to approve it through a special resolution at the firm’s general meeting. A compensation committee is appointed by the board of directors to formulate the detailed terms and conditions of the scheme.

“It is for this very reason that many companies avoid ESOSs as there is too much hassle,” says the CFO of a fertiliser company.

A partner at an audit firm explains that since shares under stock option schemes are released from a company’s issued capital, they increase the number of paid-up shares and dilute the firm’s stock price. This does not find favour with the company’s existing shareholders, even more so when stock prices are rising. As a result, shareholders resist the issue when it is brought up at the general meeting.

Another corporate sector expert says directors and sponsors, particularly of tightly held firms, are also loathe to giving ownership of their companies to employees over fears that they will start accumulating further shares from the market and eventually win a seat on the board of directors.

“Nothing could be more dreadful for sponsors than an employee who makes to the board room and is thus privy to all the matters and material that are accessible only to the directors,” says the head of a company.

Most companies therefore prefer to pay performance bonuses to their employers instead of offering an ESOS.

“Although bonus payouts hit the cash flow, it is generally found acceptable in board rooms,” admits a senior executive in a major profitable company. This executive, who has switched several jobs, confides that in 2009, when Pakistani stocks had hit the bottom in line with the global equity meltdown, several huge oil and gas exploration companies had distributed major percentages of their stocks to senior employees.

“The rebound in stock prices has multiplied the prices of those shares several times in the last two years, turning many of those who exercised the option rich,” he says.

But on the flip side, it is also difficult for the employees (generally the top-tier executives) to accept stock option plans. The reason, as explained by an executive in a multinational company, is that “employee stock options are a form of ‘call option’.

They give the employee the right to purchase the company’s stock later at the price that it is today.

“Thus, the stock option has value if the stock price goes up, and no value if the price goes down or stays the same, since the employee can simply buy the stock from the market at the same or even a better price.”

Treet Corporation Ltd — a major producer of razors, razor blades and soaps — is the only firm that has offered an ESOS to its employees this year. It has offered 2.97pc of its 54m issued shares (1.6m shares) to its employees.

The company’s CEO, Syed Shahid Ali, said in his FY15 report to shareholders that the “core objective of the ESOS is to provide incentives to management employees and junior executives of the company (including subsidiaries). This will not only slow down employee turnover but also provide [staffers] a sense of ownership of the company, resulting in better performance and company growth”.

While companies managed by sponsors who control a majority of the equity have been able to keep their employees away from share-ownership, staffers at many state-owned enterprises have received shares for free under the Benazir Employees Stock Option Scheme (BESOS).

According to sources, free shares of over 80 state-controlled firms have been distributed to regular and contractual employees of heavy-weight companies like OGDC, Pakistan Petroleum, Sui Northern and Sui Southern, PSO, Heavy Mechanical Complex, Jamshoro Power Generation Company, Pakistan National Shipping Corporation, NIT, Heavy Electrical Complex and the National Power Construction Company, among others.

Published in Dawn, Business & Finance weekly, November 9th, 2015

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