Compensation trends in India
India’s transition to a market driven economy began in 1991 with the introduction of liberalization (pro-market economic reforms). Prior to 1991, the Government was (and still is) the biggest employer and job creator, accounting for over 85% of post-matriculation (High School) jobs. Pay was largely determined by high-level agreements between employee unions and the Government and was largely guaranteed in nature. A similar situation was prevalent in the private sector, where Government pay scales were often used as a benchmark in fixing and revising pay. Compensation packages were low on cash and high on fringe benefits such as accommodation, cars, and subsidized loans. Variable pay was largely restricted to top and senior management in few private sector enterprises. Grading systems were largely industry-wide and salary progression was purely determined by length of service.
Current trends
Productivity gains (4% in 2003-04), fast growth in real wages (40% over the last 5 years), a booming but extremely competitive economy (GDP growth of 6%), simplification of tax rules and emergence of knowledge-based industries such as Information Technology & Outsourcing Services, Healthcare etc are key factors that have influenced compensation in India post liberalization. Compensation is now characterized by a Total Cost of Employment approach, a rapid movement to flexible benefits, and increasing levels of variable pay (variable pay now forms about 7% - 35% of fixed pay). Grade structures have become organization specific and salary progression is driven by market forces and individual performance. Average salary increases over 2003-04 ranged from 5% - 20%. The average increase was 11%. While most organizations benchmark compensation nationally within a select group of competitors, a few organizations are beginning to benchmark themselves internationally at senior management levels. India has the fastest compensation increase rate in the Asian region at 11.7% and it also has the highest labour turnover in the region.
Different compensation plans - how do they affect your financial results
With the introduction of FRS 102 Share-based Payment, companies are required to recognize the expenses of employee equity compensation schemes with effect from 1 January 2005. This article highlights the major implications to the financial results of the three most common equity compensation schemes, namely share option scheme, performance shares scheme, and Share Appreciation Rights (SAR, also known as phantom share scheme).
Key Characteristics
The key characteristics of each scheme are as follows:
Share option scheme
• The company grants employees the right to subscribe for new shares in the company at a fixed price.
• Employees are required to pay the company the exercise price in consideration for the shares.
• Employees can generally only exercise the right after remaining in service with the company for a period of time and/or after meeting certain performance targets.
• The right would generally expire after a period of 5 to 10 years from the date of the grant.
Performance share scheme
• The company grants employees shares in the company.
• Employees will generally receive the shares, at no cost, after remaining in service with the company for a period of time and/or after meeting certain performance targets.
Share Appreciation Rights
• Similar to the share option scheme except that:
Upon exercise of the option, the employees do not pay the exercise price to the company nor receive the shares; instead, they are paid the difference between the exercise price and the market price of the shares in cash.
While all three schemes require the use of fair values of the share options or shares for the recognition of the compensation expense over the vesting period, the impact on the company’s financial position and financial results is different.
Impact on net assets
The three schemes have a different effect on the net asset values of companies. Under FRS 102, share option scheme and performance share scheme are considered “equity-settled”. This means that in recognizing an expense for the compensation costs, a corresponding increase in shareholders’ equity is recognized. Hence, the net asset position of the company is unchanged. In contrast, obligations under SAR schemes are considered liabilities of the company, as there would be a cash settlement when the right is exercised. The recognition of the compensation cost under SAR results in a decrease in the net asset of the company.
The three schemes have a different effect on the net asset values of companies. Under FRS 102, share option scheme and performance share scheme are considered “equity-settled”. This means that in recognizing an expense for the compensation costs, a corresponding increase in shareholders’ equity is recognized. Hence, the net asset position of the company is unchanged. In contrast, obligations under SAR schemes are considered liabilities of the company, as there would be a cash settlement when the right is exercised. The recognition of the compensation cost under SAR results in a decrease in the net asset of the company.
IMPACT ON EARNINGS VOLATILITY
(1) Revaluation of share options/shares during life of grant
With share option and performance share grants, fluctuations in the values of the share options and shares during the life of the grant do not affect the results of the company. This is because the measurement of the share option or share is determined at the date of the grant and is not subsequently revalued. In contrast, for SAR, the company is required to revalue the SAR at every reporting date until the right is settled or expires. This is because the company has to measure its liability (cash payment to employees) at the expected settlement amount. Hence, SAR schemes create more volatility to the financial results. In addition, more resources are also required to perform the revaluation at every reporting date.
SAR will continue to impact earnings even after the vesting period because the liability is re-measured until the exercise date.
(2) Treatment of unvested rights
The compensation cost is a function of number of options or shares that are expected to vest by the vesting date and the fair value of the option or share. In estimating the number of options or shares expected to vest, only non-market based conditions, which are not based on the market performance of the shares, are considered. These non-market based conditions include the continuance of service over a period of time, and the meeting of a certain revenue target. If no employees meet the non-market based vesting condition by the vesting date, the company does not incur any expense. No performance shares would be issued for performance share schemes and no share options or SAR would vest. If share options or SAR are vested by vesting date, the financial impact of the two schemes is different.
For share option schemes, if the share options are not subsequently exercised by the employees (for instance, because the options are out of the money), the company is not allowed to reverse the expenses already charged to the income statement. For SAR schemes, the liabilities are stated at the expected cash settlement. If the SAR is not subsequently exercised, the company is allowed to reverse the expenses previously charged to the income statement.
Impact on Tax
Regardless of the above changes, charges to an entity’s income statement relating to share option or performance share schemes, in form of capital or notional cost (such as cost of options granted), are not tax-deductible. Compensation charges that represent actual outgoings (cash outflow or actual liability) to the company may be deductible such as the buying back of its own shares, i.e. treasury shares, to satisfy the obligation to the employees.
In addition, such share-based compensation costs must be directly related to the employee’s employment compensation benefits in Singapore to be tax-deductible. The compensation costs to the entity should match the services rendered by the employee to the same entity. Certain steps must be taken to support the claim for a deduction.
Impact on Earnings Per Share
Share option and performance share grants have a dilutive effect on EPS, as shares will be issued. For SAR schemes, shares are not issued; hence there is no dilutive effect on EPS.
Moving forward
Prior to the implementation of FRS 102, the design of the share compensation plan is often dependent on non-financial factors as the company is not required to recognize an expense on the equity instrument granted. However, with the implementation of FRS 102, it is critical for companies to consider and analyse the financial impact, arising from the design and structure of the scheme, at an early stage.
REWARDS AND BENEFITS AT IBM
Whether you're joining IBM as a fresh graduate or a seasoned professional, we believe that everyone who works here should feel valued and appreciated. That is why we offer a Total Compensation package that includes both Cash Compensation and Benefits.
Cash compensation
Performance bonus
Another principle we follow to attract, motivate and retain the most talented employees is to offer a Performance bonus. If you are a regular employee, you will have some portion of your annual compensation tied directly to business results. This is to ensure you receive the appropriate recognition and rewards.
Global recognition program
This is the pinnacle of sales excellence within IBM! We want you to know that we value your contributions and appreciate your leadership. Our Global Recognition Program is designed to bring out your best, and encourage you to inspire and motivate others.
Employee stock purchase plan
Since 1958, IBM has offered stock purchase plans because we believe in the value of employee ownership. All regular employees, including IBMers who are regular part-timers, are eligible to participate in the plan if they choose. Let's grow the company together!
Note: Governmental regulations may prohibit offering the plan or may dictate different plan provisions in certain countries.
Healthcare, well-being and personal benefits
We offer a range of personal benefits such as medical schemes, dental schemes, health screening, wellness programmes, retirements and insurance programmes. You may even be able to include your spouse/partner and dependants under your coverage for greater peace of mind. We try to be as flexible as possible, so you choose what is appropriate for your personal needs.
Flexibility and work-life balance
Quite simply, you are IBM's key to business success. We are committed to creating a workplace culture and environment in which you can balance your career with your personal priorities. We offer a number of programmes, ranging from staggered work hours to working from home to part time regular work, which give you the opportunity to achieve a better work/life balance.
Additional programmes
You will find that many of the benefits at IBM are designed to make life a little easier and a lot more fun! IBM offers employees various discounts for goods and services - IBM Personal Computer Purchase, Housing Assistance Purchase Plan, Car Purchase Assistance Plan, Child Care Services, Mobile Phone Plans, Fitness Centres, and Educational courses. You are also automatically eligible to join our many recreational, social and cultural clubs, and events. Best of all, they're not just for you, but for your entire family as well.
Staggered working hours
If you would prefer to work from home or start later in the day, you can at IBM. We give you the flexibility to manage your work hours, so you can meet the needs of your personal life.
