KARACHI, Aug 11: One of the items on the agenda at the Extra Ordinary General Meeting of Engro Chemical Pakistan Limited on August 23 is to grant “Employees Stock Option” Scheme (ESOS).

The company observes that ‘Options’ would be granted to “critical employees” so as to encourage and reward their efforts in increasing share value of the company. Such grants are governed by the Public Companies (Employee Stock Option Scheme) Rules 2001’.

Engro plans to grant Options that would aggregate five million shares equivalent to about 2.58 per cent of share capital, including the Rights offer, which is presently underway.

So who would be eligible for the ‘Options’? The company says it maintains classification levels for its management employees. Entitled employees would be those in level 26 and above. The maximum period for vesting of Options has been set at December 31, 2010 for all present employees.

The Exercise Price for Options has been fixed at Rs277 and exercise period for all present employees granted Options soon after the date of adoption would fall between January 1, 2011 and December 31, 2012.

Moreover, no employee would be allotted Options in excess of 460,000 shares and the aggregate number would not exceed five million shares in the ESOS.

A couple of companies have exercised ESOS in the past, but the concept is effective new to Pakistan. World over, companies, mainly multinationals, use the plans to compensate, retain, and attract employees so as to counter competitive pressures.

These are contracts between a company and its employees that give employees the right to buy a specific number of the company’s shares at a fixed price within a certain period of time. Employees who are granted stock options hope to profit by exercising their options at a higher price than when they were granted.

Under ESOS, companies sometimes revalue the price at which the options can be exercised. This may happen, for example, when a company’s stock price has fallen below the original exercise price.

The current market price of a share in Engro Chemical is Rs239. Eligible employees may retain the right to exercise option till the price rises significantly above Rs277.

But experts caution that Employee Stock Option Scheme (ESOS) should not be confused with Employee Stock Ownership Plans (ESOP), which is a quite a different story.

Anti-ESOS campaigners allege that when the price of a stock is fast eroding, managers are motivated to manipulate the price through widespread abuses, such as cooking accounts to show inflated earnings per share and company progress. Such options also impact cash flow, say those detractors, adding: “There is no empirical evidence to suggest that stock options affect firm performances”.

But for all that stock options are gaining popularity all over the world. Employers of listed companies here are fast realising that where perks such as cars, death and disability insurance, medical benefits, training and housing loans have become common, ESOS may yet be another effective tool to salvage employee loyalty.