ch2 importance of ethics in business
TRANSCRIPT
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IMPORTANCE OF
ETHICS IN BUSINESS
Source:
1.ICMR,Chapter2
2.Velaquez ,M.G. Business Ethics,Chapter2
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ESOs are slightly different fromregular options, because they don'thave puts and you typically must waita specified period before you areallowed to exercise the option.
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All employees and directors are eligible, except
those already holding 10 per cent of equity.
Shareholders' permission must be taken afterproviding them with complete details.
A minimum lock-in period of 1 year from the date
of grant will be applicable.
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Companies are free to determine the exercise-
price of the stock options they offer.
If the exercise-price is at a discount to themarket price, the discount will be treated asa cost Shareholders' permission must be
taken after providing them.
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1. Employee stock options are no longerreserved for the executive suites
2. ESOs are still popular, even after thedot-com crash.
3. Stock options can be expensive toexercise.
4. . You'll see these common terms .EXCERISE
STRIKE PRICE5. There are two common types of plans
10 IMPT THING
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6. Nonqualified plans are special
7. There are three main ways to exercise
options8. It's usually smart to hold options as long
as you can.
9. There may be compelling reasons toexercise early
10. Tax consequences can be tricky
10 IMPT THING(cont)
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Granting options to employees wasviewed as a good thing because it
(theoretically) aligned the interests ofthe employees (normally the keyexecutives) with those of the commonshareholders.
The Good
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Executives continued to focus primarily onquarterly performance rather than on the
long term because they were allowed to sellthe stock after exercising the options.
Tax laws allowed managements to manageearnings by increasing the use of optionsinstead of cash wages.
The Bad
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Oversized rewards given by servileboards to ineffective executives
Repricing options rewardsunderperformers at the expense of thecommon shareholder
Increases in dilution risk as more andmore options are issued
The Ugly
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According to the Central Board of Direct Taxes
(CBDT), when an employer issues shares to itsemployees at less than the market price, theemployees have to pay a price on thedifference or perquisite value. When the issueprice is equal to the market price, theperquisite value is zero and no tax needs to be
paid.
TAXATION
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Deductibility of ESOP Contributions: Company can
deduct principal and interest payments it makes on loans
used to finance stock purchased by an ESOP. This isbecause the contribution to the ESOP is deductible and
the ESOP actually pays the principal and interest
The deductibility of contributions to an ESOP becomes
even more attractive in the case of a leveraged ESOP.Under this arrangement, an ESOP takes out a cash loanfrom a bank or other lender, with the borrowed fundsbeing paid to the sponsoring employer in exchange foremployer securities.
TAXATION
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Basic purpose- Employee retention.
Companies receive financing to purchase
property, new equipment, etc.Sense of ownership among employees.
Synergize the personal goals of the
employee with that of the organization.
Improving corporate performance, by
enabling employees to participate in thecreation and sharing of the wealth they help
create in an organization.
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Why ESOP ?
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Potentially the most important reason:
Selling stock through an ESOP can defer
or permanently avoid taxation on any gainresulting from a sale.Owner diversifies assets whilemaintaining control.
ESOP buys out dissident shareholders.ESOP provides ownership succession forprivate companies.Merger & Acquisition financing strategy.
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Why ESOP ? (contd.)
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Most ESOPs act out of a trust or through aboard of directors.
In the case of board of directors, there is adirect transfer of shares in the employee'sname from the company.
In the case of a trust, the company commits
itself to transferring a certain amount ofshares.
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HOW DOES ESOP WORK
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In place of actual stock options, companies canalso offer phantom stock options, which conferstock appreciation rights.
Beneficiaries in such schemes receive a cashpayment equivalent to the rise in the values oftheir respective notional stocks without actualtransfer of shares in their names.
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HOW DOES ESOP WORK
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Employees will take over
The trust owns the shares, not theindividual employee.
No share allocation until debt is repaid.
Selling shareholder can act as Trustee.
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MISCONCEPTIONS
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Repurchase agreement / Put option
Shareholders or Company canrepurchase stock from employeesallowing control over degree in
ownership
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MISCONCEPTIONS
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Companyis less attractive tothirdpartybuyers
Buyercanliquidate the ESOP.
Buyercanuse ESOP toretainkeyemployees.
Buyercanuse ESOP to finance acquisition.
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MISCONCEPTIONS
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Which is the option involved in ESOP?
1 CALL OPTION2PUTOPTION
3PULL OPTION
4PUSHOPTION
Ans CALL OPTION
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QUIZ
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VRS is a tool to downsize the employeestrength, Tool that helps in retaining
employee.?
1 sacking
2 golden handshake
3 ESOP
4 factor analysis
Ans ESOP
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QUIZ