In this new millennium, knowledge plays a vital role in the progress of the organizations. Hence, it becomes imperative for corporations to recruit and retain a pool of knowledgeable employees. Nonetheless, this poses a great challenge to the organizations given the backdrop of the increasing rate of attrition. Factors such as shortage of skilled manpower and increasingly competitive business landscape have compelled organizations to look out for innovative ways to retain competent employees. Against this backdrop, Employee Stock Option Plan (ESOP) has emerged as an effective tool, in recent years, to motivate and retain talented employees.
Nevertheless, the concept of ESOP, which has become the corporate mantra for employee retention, may soon lose its charm once the proposal for the imposition of Fringe Benefit Tax (FBT) on ESOPs becomes a reality. In the Union Budget 2007-08, the Finance Minister of India, P Chidambaram, has announced that ESOPs will come under the tax ambit as he intends to further stretch the FBT net to ESOPs. Hence, the ultimate victims of this proposal, the employers, who are destined to bear the brunt, are likely to disapprove the issuing of ESOPs. In other words, the move may signal the end of the golden era of the ESOPs as analysts predict that the corporate world may embark on more viable motivational tools to retain their best talent.
ESOPs are typically tax qualified, contribution defined, employee benefit plans intended to provide employees with an ownership stake in the company that they work for. ESOPs, governed by the Employee Retirement Income Security Act (ERISA), were given a specific legislative framework in 1974. As per the framework, they can avail themselves of the tax benefits, provided they abide by certain rules. Among many other requirements, ERISA mandates that ESOP assets should be held in trust, and also imposes fiduciary norms on those who manage and administer the assets. To abide by these norms, the company has to set up a trust which holds the stock to be purchased by the company. Later, it appoints an individual or an institution as a trustee. |
