Introduction

ESOPs in Manufacturing Industries: A General View

ESOPs have evolved into a multifaceted strategy for manufacturing business. An industry
which shied away from the concept of ESOPs initially have adopted it in a much welcoming
way. The system is being viewed as a qualified retirement plan which is very much similar to
a profit sharing plan. It enables employees to own part of the company that actually employs
them. Through this project we have tried to understand the separate stock option plans of two
companies – Berger Paints & Huawei, a telecommunication giant.

Data Source and Methodology

For collecting data we had to majorly go for secondary data source from internet. We did
collect data from annual financial reports of some companies from manufacturing industry
(Berger Paints, Huawei). The various ESOP and benefit scheme were looked upon and
analysed to find out the various implications of the regulations and schemes in terms of
business results and employee productivity.

Analysis
BERGER PAINTS
ESOP
The objective of Berger Paints behind giving ESOPs to employees are
 Attract, retain and motivate Employees
 Create and share wealth with the Employees
 Recognise and reward employee performance with shares, and
 Encourage employees to align individual performance with the objective of the
Parent Company.

PARTICULARS Employee Stock Options - Employee Stock Options -

Date of Shareholder’s
approval
Total number of options
approved under ESOP
2010 2016
29th July 2010 3rd August 2016
1,73,03,623 options 3,46,78,470 options
representing equity shares of representing equity shares
a face value of 2/- each i.e. of a face value of 1/- each.
3,46,07,246 options
representing equity shares of
a face value of 1/- each,
consequent to sub-division
of shares from face value of
2/- to 1/- as approved by the
shareholders on 30th
December, 2014.

Vesting Requirements
Options shall vest over a
period of 3 years from the
date of
grant of options as under : a)
33% on first anniversary of
Grant Date b) 33% on
second anniversary of
Grant Date
Options shall vest over a
period of 3 years from the
date of
grant of options as under : a)
33% on first anniversary of
Grant Date b) 33% on
second anniversary of Grant
Date
 and c) 34% on third and c) 34% on third
anniversary of Grant Date anniversary of Grant Date
rounded up rounded up to whole
to whole numbers numbers.

Exercise price Re 1 Re 1
Maximum term of 10 years 10 years
options granted

 Accounting for ESOP is done using fair value

Particulars Employee Stock Option Scheme 2016
No. of options granted during the year 140,811
No. of options forfeited/lapsed during the 2,541
year
No. of options outstanding at the end of the 138,270
year

OUR ANALYSIS ON EMPLOYEE BENEFITS

Employee
expenses as a %
Year Employee expenses Revenues PAT of revenues
2016-17 227.92 4608.53 446.45 4.945612
2015-16 203.76 4305.51 356.26 4.73254
2014-15 178.21 4212.94 266.03 4.230063
2013-14 158.74 3735.35 234.25 4.249669
2012-13 139.96 3330.61 209.8 4.202233
2011-12 122.32 2901.22 177.39 4.216157
2010-11 106.7 2299.1 148.3 4.640946

Expenses vs PAT
500 446.45
450
400 356.26
350
266.03
300 227.92 234.25
250 203.76 209.8
178.21 158.74 177.39
200 139.96 148.3
122.32 106.7
150
100
50
0
1 2 3 4 5 6 7
Employee expenses 227.92 203.76 178.21 158.74 139.96 122.32 106.7
PAT 446.45 356.26 266.03 234.25 209.8 177.39 148.3

Employee expenses PAT

 Employee expenses as a % of revenues
5.2
4.945611724
5
4.732540396
4.8 4.640946457
4.6
4.4 4.2300626174.2496687064.2022332254.216157341
4.2
4
3.8
2016-17 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11
Employee expenses as a % of
4.9456117244.7325403964.2300626174.2496687064.2022332254.2161573414.640946457
revenues

Expenses made by Berger paints on people engaged in R&D

31st March 2017 31st March 2016
Employee Benefits 9.08 crores 6.72 crores
Expenses

So it is quite clear that

 Berger Paints cut down on its % expenses on employees which can be in the form of
salaries, training opportunities, bonuses etc. post 2011
 From 2012 onwards till 2014, the % expenditure on employees was constant
 Post 2015, we can see a sharp rise in % expenses on employees, which shows that
Berger Paints was more liberal towards its employees
 Also post 2015, the PAT increased drastically but the % rise of employee benefits was
comparatively less
 Also Berger increased its expenses on employees focussing on R&D from 6.72 crores
to 9.08 crores which is quite significant.
EMPLOYEE BENEFITS and SALARIES of key Personnel
Employee Benefits in Berger

Defined Contribution Plan Defined Benefit Plan

1)Superannuation
2)Provident Fund(contribution
made according to the Act)
1)Gratuity Long Term Compensated
Absences
2)Provident Fund(In the case Accumulated leave are
of Trust contribution, Berger carried forward as long-
compensates the shortfall, term employee benefit
between the return from the
investments made by the Trust
and the notified interest rate)
SALARIES VS ESOP

Senior Management Designation No. of options Exercise price per

Personnel granted in option
2016-17
Mr. Abhijit Roy Managing Director & CEO 3,600 Re 1
Mr. Srijit Dasgupta Director- Finance & CFO 2,769 Re 1
Mr. Aniruddha Sen Sr. Vice President & 1,848 Re 1
Company
Secretary

PAY COMPENSATION FOR 2017

Mr. Aniruddha
Sen
Mr. Srijit (Senior Vice
Mr. Abhijit Dasgupta President &
Roy (Director- Company
(MD, CEO & Finance, Secretary &
KMP) CFO & KMP) KMP)
Gross Salary
Salary as per provision contained in
section 17(1) of the
Income-tax Act, 1961 59,06,400 62,59,500 24,44,710
Value of perquisites u/s 17(2)
Income-tax Act, 1961 12,90,600 12,51,780 4,09,175
Profits in lieu of salary under Section
17(3) Income Tax Act, 1961 88,77,960 34,60,035 48,19,302

Stock Option 9,61,984 7,30,609 4,78,278

Sweat Equity
Commission 30,81,600

Total 2,01,18,544 1,17,01,924 81,51,465

% Increase in
Stock options
ESOP as a % of from previous
total salary year

Mr. Abhijit Roy(CEO) 5.98% 0.374226598

Mr. Srijit Dasgupta 6.66% 0.37899889

Mr. Aniruddha Sen 6.23% 0.38638616
 ESOP vs SALARY
6.66%
7.00% 6.23%
5.98%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00% 0.37% 0.38% 0.39%
0.00%
Mr. Abhijit Roy Mr. Srijit Dasgupta Mr. Aniruddha Sen
ESOP as a % of total salary 5.98% 6.66% 6.23%
% Increase in Stock options from previous
0.37% 0.38% 0.39%
year

ESOP as a % of total salary % Increase in Stock options from previous year

 From the data above, it is quite clear that ESOP as a % of salary for the CFO and the
senior vice president is more than the CEO himself, however the commission that
CEO receives is unique and increases the salary of the CEO
 Also the % increase in stock option from previous year is most for the CFO, then the
SVP and finally the CEO

 Berger Paints issued 193792 shares between 2015 and 2016

 For the period between 2016 and 2017, it issued total shares of 277508735 worth
27.78 crores which also conforms with the profitability of the firm which has
gradually increased in the same period
 As the firm generates higher revenues, the issue of shares to the investors and
employees is steadily increasing which is a good sign for the growth of the firm
ESOP in Huawei
Huawei was finding it difficult to finance externally for marketing and expansion. So just
after 3 years of its founding Huawei implemented an ESOP program. This resulted in
employees financing Huawei for their business needs.
ESOP plan in 1990
Stocks available to employees=15%
Employees did not elect leaders for the management of company’s ESOP program.
Price of each share= 10 RMB
Huawei also had the right to repurchase stocks at the price of 10 RMB/share from employees
who were leaving the company.
Employee shareholders did not have the bargaining power.
ESOP Plan in 1997
Now the focus was shifting from financing their own company to incentivizing employee
productivity.
Price of each share= 1 RMB
Employee return came in form of dividends.
Employees were allowed to take loans to purchase shares which in turn encouraged larger
number of purchase of ESOP shares.
ESOP Plan in 2001
Stock Price= 2.64 RMB/share
Employee Return did not come in form of fixed dividends. Dividends were linked to change
in net assets of the company. This linking further encouraged the employee ownership and
Huawei was seen more as an employee owned firm.
Huawei ESOP regulations
 All employees are eligible to purchase stocks and it’s in their hands whether to
purchase or not the stocks.
 Amount of stocks offered to an employee per year and maximum amount of stock an
employee can hold in total is set by the company.
 The percentage increase in stock price is directly proportional to the percentage
increase in net assets over the previous year.
 An employee’s position, work experience and performance evaluation results from
the previous year may factor into the ESOP shares they are offered.
 Dividend is decided as per the profitability of the firm at the end of fiscal year.
Employees are allowed to sell their shares to Huawei. Company also can withdraw
stocks from poorly performing employees as well as per the net asset value.
Productivity in terms of asset turnover

Average asset
turnover in listed
telecom
companies in
China was 0.68
Employee Productivity

Adjusted Productivity Growth

1.8

1.6
1.56
1.45
1.4
1.34
1.2
1.05
1 1

0.8

0.6

0.4

0.2

0
2006 2007 2008 2009 2010

Conclusion

From the analysis above we can see that the ESOP and benefit scheme can not only drive
employee productivity but also increase profitability of the company if it is implemented
properly according to the business needs. The employees take the partial ownership of the
company which in turn acts as a motivation tool and might result in lowering attrition rate as
well.