When it comes to implementing stock-based compensation, the choice is really between choosing Equity-Settled Instruments (such as ESOPs or RSUs) or Cash-Settled Instruments (such as SARs or Phantom Stocks). Both equity and cash settled instruments can be structured to result in similar monetary outcomes for the employees but their impact from a shareholder and Company’s income statement perspective may materially differ.
Choosing the right scheme is key to ensuring you optimize outcomes for all three stakeholders i.e. shareholders, employees and Company. Below is a quick snapshot of how the two categories of instruments differ:
| Criteria | Equity Settled Instruments (ESOPs / RSUs / ESPPs) | Cash Settled Instruments (SARs / Phantom Stocks) |
|---|---|---|
| Dilution | Part of the capital table and hence dilutive in nature. | Does not form part of the capital table and hence non-dilutive in nature. |
| Flexibility | Requires compliance under Companies Act, FEMA and SEBI Regulations. | Outside purview of Company's Act offering greater flexibility in structuring the instrument. Private companies often use these instruments to incentivize advisors or consultants. |
| Settlement | Typically settled as part of external corporate transactions or Liquidity events (such as IPO, Strategic sale, etc.) in private companies. Listed entity employees can convert ESOPs to shares and trade in the open market. |
Can be structured to be: • Settled in same manner as ESOPs, i.e., as part of corporate transactions or Liquidity Events; or • Settled internally at end of fixed period basis pre-agreed valuation formula. |
| Financial Implications for Company | Treated as Equity in books of accounts, leading to a notional charge recognized over vesting period. | Treated as a Liability in books of accounts, leading to creation of provision which is remeasured at market to market basis until settled. |
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