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Here’s The Feelgood Option

Part-owner employees are loyal, happy-and rich. And the trend is not limited to the infotech sector either.

Here’s The Feelgood Option
outlookindia.com
-0001-11-30T00:00:00+0553

Walter Saldanha. 24. Wears white T-shirt, blue jeans, Reeboks and a shy smile. Your average college-going kid with dreams of hitting it big. Only, this kid might hit the jackpot sooner than most of us can hope for.

Two years ago, Saldanha joined Aditi, a software start-up, at a stipend of Rs 5,000. Six months later, he got stock options. "Share prices till then were black ink on pink paper. I stashed away my options in a briefcase, shut it and forgot it," he says. Today, Saldanha’s sure he is sitting on a gold mine. On the computer screen in front of him, a small window keeps flashing the movement of infotech stocks. He does a quick calculation. Even if he holds only 1,000 shares (he won’t tell exactly) and all goes according to plan-Aditi goes public in a year and gets a respectable market capitalisation-he will be a clear millionaire by 28: "I don’t see how or why it won’t happen. If a Sonata share I bought at Rs 90 listed at Rs 200 and has touched Rs 2,500, I don’t see why Aditi shouldn’t open at Rs 800 and go to Rs 3-4,000 in a year’s time."

Calculations like Saldanha’s are getting commonplace. Meet 26-year-old Mony Shetty. Reed-thin, casually-dressed, this daughter of a government employee hardly conjures up the image of a budding millionaire, yellow cellphone and brand new Matiz notwithstanding. Yet, in less than a year, her personal worth could touch the magical six figures. How does it feel to be a millionaire? "Awesome. Stocks are the modern-day equivalent to winning a lottery," says Shetty. What if she didn’t have stock options? "I’d be perhaps doing my PhD in biochemistry and saving for the future like my father did all his working life. With stocks, the future is now."

Sure, we all know that the rules of becoming rich are no longer the same. Yet youngsters like Shetty and Saldanha are telling a brand new story.

Well, actually it began some years ago with an astonishing entrepreneur called N.S. Narayanamurthy, who decided that to make Infosys as good as any company in Silicon Valley, he would have to follow Silicon Valley employment rules: make employees part-owners of the company. As a former leftist, he was deeply committed to wealth distribution and as a diehard capitalist now, he knows the most committed employees are those who have a clear stake in the company’s success. Infosys grew by leaps and bounds and the stockmarket has been wild about it for years. As India globalised, as Indian success stories in Silicon Valley started trickling in, Indian industry began realising that the new rules of the game dictated a blurring of the lines between owner and employee.

The result is a revolution sweeping across corporate India: mass entrepreneurship at all levels of organisations as employees turn stakeholders in the real sense.

"If I were in a different place, at another time, I’d perhaps be working in sail or some such staid public sector organisation. Leave alone talking of riches, I would be working for my pension all my life," says P.V. Sridhar, associate consultant at Wipro. Today, Sridhar is firming up plans to buy a ‘decent’ house in Bangalore; he drives a Zen and has gifted a car to his parents while financing his sister’s MCA degree. "Life is being able to spend and support your family without thinking," says this son of a paddy farmer whose elder sister had to drop out of engineering as the family could not afford the costs. He’s just one of the several hundred Wipro employees sitting on an options stash worth more than Rs 10 lakh at current prices. According to a Nasscom estimate, some 10,000 infotech sector employees have been vested with 18 million shares in 151 companies that might be worth Rs 12,000 crore at current market capitalisation levels.

And it’s not just techies reaping the spoils. Receptionists, office boys, secretaries, even workmen are beneficiaries. Meet Anne D’Souza, executive secretary to the managing director, Sonata Software, who quit anz Grindlays to join up. "My job is the same-sending faxes, fixing appointments, getting signatures put to deals-and how much salary can a secretary hope to get for donkey work? But stock options have opened up an entirely new dimension. I will have enough to send my three girls for engineering degrees abroad." Stock options are not just a financial instrument, they are hope and faith.

At Gray Cell, we met Julian Philip, 26, a former professional jazz musician, who heads the media and design labs of the company and is in charge of product-user interface, marketing communication and maintenance of the product on a day-to-day basis. Julian is loath to discuss money; he says he is basically here "to participate in changing the world". But he does confess he knows his "net worth would probably be in six figures soon". Srikanth Belwadi is more frank: "I’m betting that I should be able to clear Rs 10 crore in three to four years and take a world tour, buy a BMW and create my own company. Why be apologetic about wealth?" This provokes others. "I run a monthly bill of Rs 3,000 on my mobile, eat out every other day and wear only branded garments. Why the heck should I think before spending?" asks Yogesh Kamath, whose friends call him a walking advertisement for Nike and Levi’s. "For five years now, doomsayers have been predicting the end of the infotech bubble in Silicon Valley. It hasn’t happened. Why will it happen now? So what if it’s paper wealth now? Why talk about market volatility? If Silicon Valley has given enough resources to infotech employees, there’s no reason why we won’t benefit," says Paraj Kakar, business development manager. "I want to create new technology. That’s a personal mission and that kind of mission requires resources. Stock options give you that," says Vikas Murthy, chief technology officer. Murthy found engineering classes too boring and chucked up college in his second year to start working. He has been at the heart of Gray Cell’s technological successes from the first e-mail-to-paging gateways to engineering the Unimobile, a software device that will enable people to talk to nearly any mobile gadget. Nobody at Gray Cell is either dismissive or apologetic about wealth creation or accumulation. There are suddenly no access barriers to being rich-no degree or pedigree matters.

Simply put, this is how a typical stock option plan works: a firm gives an employee the right to buy a certain number of its shares at a set price. After a vesting period of two to three years, the employee can buy the share at the options price, which might be a discounted price or a fair-value price (market price on the day of grant). He can now sell them at the prevailing market price and take home the profit if, over those years, the price has gone up. Let’s say you get options to buy 1,000 shares of your company at the current market price of, say, Rs 50. If the stock goes up to Rs 2,000, you can buy 1,000 shares for Rs 50,000 and sell them for Rs 20,00,000.

Nothing magical about that, until you consider what happens when a company gives out lots and lots of these options. First, the company’s fixed cost on salaries comes down when options are built into the compensation package. At the same time, the effective compensation of employees go up. As the shares are granted often at par value or at a discounted price and the market moves up, the readily realisable value of these options is far in excess of the cash salaries they replace. The firm gains since low salary expenses mean high earnings. This is how companies like Infosys have created hundreds of millionaires and many billionaires. Salaries have gone down but the markets have compensetaed them manifold.

Little wonder that even non-infotech companies are jumping on to the bandwagon. At McDonald and Enron, employees are given stock appreciation rights of the parent company listed on the New York Stock Exchange or NASDAQ. No buying or selling takes place. There’s no physical transfer of either money or shares. Employees get the difference in value between the grant price and the value of the share at the time the rights are exercised. FMCG giant Procter & Gamble has for starters given a one-time grant to 700 employees with a five-year vesting period. At McDonald’s, a small start has been made with 40 employees but more will come under the scheme soon. Says Vikram Bakshi, managing director, McDonald Delhi: "We aim to take the scheme ultimately to even the doorman; he is after all the first point of contact the consumer has with McDonald’s. If he is happy, the customer’s happy and happy customers make for happy companies."

Now even home-grown, non-IT firms like Zee Telefilms, Dabur, SRF and Max India are taking the cue. Last year, some 4.6 lakh stock options convertible into equity shares of Rs 10 each (the share split a few months ago to Re 1 per share to equal 46 lakh shares) were given to some 65 employees of Zee and its associate companies. Last week, some more employees came within the ambit of the scheme. Dabur has offered 25,000 equity shares to 50 key executives at a discounted price of Rs 300, nearly a quarter of the scrip’s current market value. srf has issued about 28 lakh shares to its employees at Rs 15 per share. Max has reserved some 5 per cent of its issued capital for employees. "Stock options are to the technology era what performance bonus was to the financial era of the ‘80s and target incentives to the marketing era of the ‘70s, a potent way to fuel the growth engine," says Ravi Virmani, CEO of hrd consultancy Hewitt Associates.

Start-ups use stock options to lure top talent to get the company going. Newly minted garment marketing company Indus League is talking of giving stock options to key business associates as well. "New companies which we consult for are offering to pay our part-fees by way of stock options," confirms Virmani.

At Texas Instruments, 65 per cent of the employees are covered by a cashless, automated plan staggered over five to 10 years. An employee may get 25 per cent of his share rights at the end of the first year, 50 per cent two years after that and so on. "Stock options are not a cheap tool to be given freely to everybody. It’s a reward for past performance as well as future potential and so must be used judiciously," says M. Kirtane, human resources head. Agrees Shantanu Rudra, general manager, NIIT, which is diluting 5 per cent of its current equity to grant 1.3 million shares to 800 employees: "Equity is expensive capital and options plans must be properly structured so that the return on investment is high. Options must be given selectively and be performance-driven." At Wipro, 55 per cent of the options vest only in the last two years of the five-year vesting period. This is skillful brandishing of the carrot. At Intel, says manager Amit Verma, the attrition rate has come down 2 per cent since the scheme began.

At family-run companies like Max, SRF and Dabur, promoters are looking to take on a more leadership and visionary role, leaving the day-to-day management operations to professionals. At these companies, stock options help align the personal interest of the senior management with that of the company’s. And also the interests of the shareholders with those of the management. Traditionally, shareholders tend to focus on results and profits every quarter, rewarding and forcing managements to take myopic short-term views. But when the managers themselves are stakeholders, they are better able to take a balanced view and project it convincingly. Third, when employees down the line are also part-owners of the company, their sense of involvement increases manifold. "I have seen for myself the ennui in manufacturing and product-driven companies towards company performance. Most people feel: what’s in it for me? But when you give stock options, watch the emotional response it creates," says Verma.

A booming stockmarket is undoubtedly the single most important factor driving the stock option surge. Check the business dailies, where the net worth game is played out daily. Now Azim Premji is the richest Indian on earth...now he’s the world’s fourth richest...he’s overtaken Warren Buffet...he might even pip Bill Gates. Just the other day, Wipro had 300 millionaire employees, a few weeks later, it had 1,600 millionaires and now it has some 32 billionaires among its stakeholders. Narayanamurthy has acquired demigod status. Stories keep filtering in of Silicon Valley whizkids raking in billions. With the hysteria backed with hard market capitalisation figures, one doesn’t need a crystal ball to predict that companies of the future will be companies with a strong wealth-sharing philosophy.

This is wonderful news for Indian professionals. When consumer goods companies like Hindustan Lever or energy companies like Enron or tyre cord companies like SRF say that they are a people and not product company, it means a certain recognition for employee power at last. "Earlier, man was clubbed with machinery and money as a productive tool to be managed. Now he is looked upon as a stakeholder whom the company owes responsibility to," says Sushil Ramola, vice-president, SRF.

Stories of nascent capitalism are everywhere. At 24, Hemant Sharma was Microsoft’s youngest technical manager and got ‘enough’ options. The stock would touch dizzy heights, split, and start soaring again. Many Microsofters just retired. Sharma chose to return to India and three years ago started Trisoft Design. "Victory rarely follows mouse-like timidity. It requires bold masterstrokes," he says. In six months, Sharma claims Trisoft will be valued at $100 million and 15 per cent of it will be employee-owned.

At the McKinseys, Pepsis and Cokes of the world, executives are quitting for lesser-paying jobs that offer options. Says A.P. Srivatsan, who quit as CEO, Pepsico, Nepal, to join Zip Telecom, "I took a 15-20 per cent cut in lieu of options worth around Rs 10 lakh. In three years’ time, these would be worth a lot. I moved from Bandra to Andheri but as owner you think differently."

More important, however, is that stock options give people a chance to fulfill their dreams sitting right here in India. "Earlier, the most logical thing to do in software was to step out of college and board the next plane to the US. With stock options, you can be with friends and family right here and not feel like the poor country cousin of those who fled to Silicon Valley," says Shetty of Gray Cell. "My dream is not about owning a yacht in the Caribbean. It’s about a small car, a small house, good education for the kids and fun time with the family," says Prasad T.G.C, associate director at MindTree Consulting. So long as stock options help fulfill these small dreams of common professionals, the options mania will continue to grow.

 

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