Why ESOP re-pricing is not fair?

Employee Stock Option Plans (ESOPs) are performance based incentive to reward employees. Usually ESOPs come with a vesting period to eliminate short term benefits, which could lead to excessive risk taking behavior in short term and therefore aligns shareholder’s interest with the employees. In the normal course, if the company performs well, ESOP holders gain from stock price increases and if the company performs poorly, the ESOPs expire worthlessly. We raise two issues connected with ESOPs, First if the share price falls should the shareholders approve ESOP re-pricing? A second issue that arises is vesting of ESOPs upon early retirement, voluntary or otherwise. Should the
ESOPs be awarded completely, pro-rata or none at all?
The current practices followed in India indictate that re-pricing of ESOP is legitimate if approved by shareholders by a simple majority. There are two issues here. First, if the issuance of ESOPs requires a special resolution, i.e. 75% majority, why is the re-pricing an ordinary resolution? And second, if the other shareholders who bought shares at high price have no means to recover their actual losses, should the management be allowed to restore potential gains by re-pricing the ESOPs? After all, when the markets go down, the employees lose only their potential profits whereas the shareholders actually lose their money. How can the re-pricing be justified?
When ESOPs are issued, the option holders are at par with the shareholders.This ensures that when markets bounce both are entitled to gain proportionally. Therefore, ESOP re-pricing amounts to preferential treatment. A further consideration that should go into ESOP awards is that the incentives should be structured to ride through business cycles and, performance gratitude should be relative to company’s performance in peer group. Re-pricing ESOP amounts could amount to allowing premium for non- performance. It insulates management from bad performance. Further, it indicates that the ESOP holders have a short term commitment and they are either in a hurry to cash out lacking confidence or they do not see gains even in long term. Why should the company protect employees from risks associated with equity investment? Especially considering such risk protection is not available to shareholders who would have purchased the shares at a price higher or equal to ESOP price, basing their investment decision on the strength of faith in prospects of company.
The second point in ESOP is vesting of options upon early retirement. SEBI guidelines of 1999 on ESOP (11.6) states that: “In the event of resignation or termination of the employee, all options not vested as on that day shall expire. “ SES has come across a case where an outgoing chairman who resigned two year before completing his term was allowed all options which were to be vested to him in following years. While the compensation committee and shareholders approved vesting of unvested options that otherwise would have lapsed, it defeated the intended purpose. We believe that stock options with vesting periods are provided to (a) Retain executives and (b) Align executive compensation with long term company performance. Since vesting of unvested options defeats both these purposes, the equity awards should have been either vested pro-rata or should not vest at all. Vesting of options for future period amounts to providing benefits even for the period which have not been served. We feel that this was in violation of SEBI ESOP Guidelines 1999 (clause 11.6) as shareholders cannot approve what is not permitted in law.
Considering the above, we believe that SEBI should relook at ESOP guidelines and if it is felt that the issues raised above are legitimate, then what we have stated above deserves a serious discussion.