A week ago, the Securities and Exchange Commission of Pakistan unveiled ‘Guidelines for Structuring and Offering of Employees Stock Option Schemes 2016’.

The 2001 rules, still afloat for the last 15 years, have scarcely managed to grab the spotlight. The SECP’s annual reports year after year recorded no such offerings.

But it finally felt a breeze of fresh air when in FY15, Treet Corporation Limited sought approval of the chief regulator to distribute 2.97pc of its 54m issued shares (1.6m shares) to its employees under the Employees Stock Option Scheme (ESOS).

On the occasion of the release of the fresh guidelines, the SECP noted: “Employees Stock Option Schemes are the programmes offered by the public companies to their employees which give the employees the right, without obligation, to purchase specified number of shares of the company at a predefined price, within a stipulated time period”. And the regulator went on to add: “ESOS provides the employees the opportunity to get ownership in the company which may help increase productivity and growth in the business of the company”.

The guidelines provide for composition of the compensation committee, duties and responsibilities of the committee, methodology for deriving the exercise price, procedure for approval of the Schemes, disclosures to be made in the scheme, format of application form, list of documents to be submitted with the application and model scheme. The chief regulator says: “the purpose of the guidelines is to facilitate the public limited companies in structuring and administration of their Employees Stock Option Schemes”.

But most corporate top brass, all of whom wished to remain anonymous, said that on the contrary, such regulations and enormous amount of paper work are what drives away even the potential offerers of ESOS. “A cursory glance at the rules makes the company managements shudder”, said one CEO of a textile firm. “Apart from all those procedural requirements, the rules list around two dozen documents that ought to be filed with the SECP” said he, adding “Already hounded by plethora of compliance requirement documents, who would make bold to assume new responsibilities?”

“Companies usually offer share options to the CEO, MD and couple of top executives, which is considered a part of their compensation package,” said a non-executive director of a major pharma firm

Several corporate experts reckoned that like the ‘share buy-back or treasury stock’ scheme, which evidenced scant interest by companies even with huge sums in retained earnings on their balance sheets, the ESOP has nothing concrete to ignite interest of company managements.

It is true that stock options are fairly popular in developed markets and are usually offered at lower than the market price of the stock.

While private companies have generally shrugged off the idea of employee partnership in ownership, scores of state-owned companies have distributed shares to employees of big companies. But corporate experts dismiss them as politically motivated without looking deeper into the implications.

“How many of those companies started to show stellar financial results following the participation of employees as owners by virtue of share ownership schemes?”, asks a head of a multinational foods-to-consumer goods company. He admitted that the overseas parent of his own firm was lavish in offering employees stock options, yet the local subsidiary had kept itself aloof from that additional responsibility. He said that most bigger firms, mainly the multinationals avoid making employees as owners through share offers.

“Companies usually offer share options to the CEO, MD and couple of top executives, which is considered a part of their compensation package”, said a non-executive director of a major pharma firm. He conceded that such an option was purely to retain extensively experienced and highly qualified men on the top slot.

With more and more young men with diverse qualifications joining the ranks of the unemployed, companies have little reason to worry over the employee turnover in the lower and middle-level management. In order to acknowledge extraordinary brilliant performances, corporates usually choose to distribute cash as ‘annual performance bonuses’ along with increase in pay and perks, instead of giving employees access to company ownership through issue of share options.

“The large amounts paid in performance bonus payouts hit the cash flow but it is generally found acceptable in board rooms,” admits a senior executive in a major profitable company.

Timid managements of particularly closely held companies avoid the stock option schemes for they fear that as a shareholder, an employee could surreptitiously accumulate enough shares to grab a seat on the Board. “Most companies, due to the secretive culture are comfortable only by keeping the employees at arms length”, says a recently retired secretary of a major automobile firm.

There are other reasons for the companies to avoid ESOS as a plague. The additional shares increase the market float, which instantly dilutes the company’s stock price at the market as well as lower’s its book value. This does not find favour with the company’s existing shareholders in times of escalating stock prices as currently is the case.

But on the flip side, many employees may not always be waiting for a chance to leap and exercise the stock option, if and when one presents itself. The reason being that the ESOS are a form of ‘call option’. They give the employee the right to purchase the company’s stock later at the price that prevails at the time of offer of the scheme.

“Thus, the stock option has value if the stock price goes up” says an analyst. The ESOS may go very wrong if the price of company stock takes a steep dip. In such a case, employees would be better placed to simply buy the stock from the market. The company managements in such cases may have to face a grumbling crowd of employees who have, to their regret, already exercised the option.

Published in Dawn, Business & Finance weekly, May 9th, 2016