Ghani Global Holdings Limited — a company listed in the ‘’Glass and Ceramics” sector of the Pakistan Stock Exchange (PSX) informed the investors last week that the apex regulator Securities and Exchange Commission of Pakistan (SECP) had approved the Company’s Employee Stock Option Scheme (ESOS). The company said it was allowed to issue shares of Rs10 each representing 15 per cent of its outstanding share capital to its eligible employees under ESOS, 2020, by way of other than right offer.

It raised eyebrows for the concept of ESOS, though fairly normal in the developed world, has forever been avoided by the country’s corporate sector. Discussions with senior officials at several entities revealed that many were not fully familiar with the concept and only a handful could tell the difference between ESOS and the Employees Share Ownership Plan (ESOP).

The US Securities and Exchange Commission sifts the two in the following manner: “An employee stock ownership plan is a retirement plan in which an employer contributes its stock to the plan for the benefit of the company’s employees. This type of plan should not be confused with employee stock option plans, which give employees the right to buy their company’s stock at a set price after a certain period of time.”

Family-owned businesses with tens of billions of rupees acknowledge extraordinary brilliant employee performances through higher remuneration in cash bonuses but avoid sharing equity

Majyd Aziz, former President of Karachi Chamber of Commerce and Industry and the Employers’ Federation of Pakistan, recalls that the most well-known ESOP — not 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. Many corporate stalwarts, however, prefer to term that transaction as an “employee buyout” and not ESOP.

A chief financial officer of a major multinational company admitted that the ESOPs were far fewer in numbers in the country’s corporate sector. He said that, unlike performance bonuses, ESOPs were not necessarily a regular feature. “When a company launches a new project or goes into an expansion that could take three to four years for completion, it needs to retain experienced and trained staff often at the executive level. In such cases, companies may offer ESOPS to make their remuneration package attractive to be able to retain such essential staff”, he said.

He also observed that there was the concept of “phantom” shares where the company does not actually disburse shares in ESOP but offer senior employees the opportunity to use the call option. They give such employees the right to purchase the company’s stock later at the price that prevails at the time of the offer of the scheme. The employee may take or leave the offer depending on his view of the rise or fall in stock price going forward.

A director on the board of a billion-rupee-turnover company said that different companies that go for ESOP have their own policies. “Our board of directors offer shares to the foreign members on the board, sometimes CEOs, but those shares are in companies that are usually listed on the Wall Street or the London Stock Exchange”, he said.

Economist Khurram Schehzad, CEO of Alpha Beta Core said that the concept of wealth sharing with employees/shareholders is not a very popular policy on company boards. Besides, family-owned businesses still thrive and the owners’ suspicion over distributing equity even if in the form of nominal shares to an outsider, is not preferred by companies with closely-held shares by the members of the family.

Family-owned businesses, therefore, do acknowledge extraordinary brilliant employee performances but are willing to compensate such employees by offering higher remuneration in cash and ‘additional annual performance bonuses’ but avoid the offering of initiative in the form of ESOS.

An industrialist said that private companies loathe going public even when they are doing roaring business with tens of billions of rupees in sales. “In March 2021, the number of registered companies with the SECP stood at 139,620, while only 520 have opted to seek listing at the PSX. In such circumstances, the concept of ESOS would take a long time to take root”, he mused.

The ESOSs are governed by the SECP under the ‘Public Companies (Employees Stock Option Scheme) Rule 2001’. Amendments, a new set of rules and regulations and modifications in schemes have all been introduced from time to time. But like some other initiatives such as share buyback or treasury stock schemes, nothing has caught the fancy of company boards.

Like many other regulations including the Code of Corporate Governance, the guidelines set in the ‘Public Companies (Employees Stock Option Scheme) Rule 2001’ are not without hassle. There is the requirement for composition of the compensation committee, its duties and responsibilities, methodology for deriving the exercise price, the procedure for approval of the schemes, disclosures, format of the application form, list of documents to be submitted with the application and a model scheme.

In early April this year, the SECP officially allowed private companies to offer Employee Stock Option Plan (ESOP) to their employees, which the regulator said was “essentially an effort by the SECP to support Pakistan’s nascent start-up ecosystem”. The regulator reiterated that the ESOP was a popular method of attracting, motivating, and retaining employees.

“Stock option plans permit employees to share in the company’s success without requiring a start-up business to spend precious cash,” the regulator observed.

Published in Dawn, The Business and Finance Weekly, June 28th, 2021

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