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Choosing cash over stock may not pay off for Vodafone Idea executives

To save themselves from price uncertainties, execs want cash over stock options as long-term incentives.

, ET Bureau|
Updated: Sep 11, 2019, 12.02 PM IST
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Executive salaries at the Kumar Mangalam Birla-led telco are split into a fixed component of 60% and a bonus of 40%.
MUMBAI: The strategy of Vodafone Idea’s brass picking cash over stock options as a long-term incentive to insulate themselves from share price uncertainties may not be paying off, people familiar with the matter said.

The stock has crashed 83% since Vodafone India and Idea Cellular merged one year ago. However, the cash component may shrink, too, as the telco loses revenue market share and customers – key parameters to which the incentive is linked. And analysts expect a further decline in these benchmarks.

Executive salaries at the Kumar Mangalam Birla-led telco are split into a fixed component of 60% and a bonus of 40%. The cash incentive, over and above this, accounts for 30-35% of the overall compensation and is linked to revenue and customer market shares over four years, the people said.

“When compensation for brass was decided, the management agreed to link their long-term incentives to parameters like revenue market share and customer market share. This call was taken despite erstwhile Idea Cellular and Vodafone India offering stock options to senior employees before the merger,” said one of the people. “It is not common in listed companies to give cash.”

Vodafone Idea said it will not comment on any speculation about compensation.

“As a practice and in line with industry norms, VIL offers Long Term Incentives to eligible employees basis performance against specific long term KPIs which focus on the company performance and value creation for shareholders,” Vodafone Idea said in an emailed statement.

“Giving cash instead of stocks when two companies are merging helps to bring top management from both firms on common ground. Also, while the merger is taking place, coming to a fair valuation of the new entity may not be easy and thus, cash for long-term incentives helps,” said a telecom analyst who did not want to be identified. The Mumbai-based analyst added that cash is considered more secure when future share values are uncertain, given industry conditions.

After the merger on August 31, 2018, Vodafone Idea started as India’s No. 1 telco by customer market share – over 40% – and revenue market share – over 35%.

Revenue share has now narrowed to 28.1% and the company has slipped to No. 3. Analysts said it’s not yet the bottom. The share price has fallen to Rs 5.31 from Rs 30.83 after the merger. In addition, Balesh Sharma quit as CEO 11 months into the job and was replaced by Ravinder Takkar, amid falling revenue and quarterly losses at almost Rs 5,000 crore.
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Vodafone Idea’s revenue market share may stabilise at 20% in the medium term, said Rajiv Sharma, co-head of research at SBICap Securities. In July, SBICap Securities said the company could see a “70 million additional subscriber decline over the next six quarters” and its subscriber market share slipping to 23% by March 2020.

The operator, which had 422 million subscribers at the end of last September, ended this June quarter with 320 million, as per company data. Rival Airtel has curbed customer exits, while Reliance Jio has gained users every quarter and is targeting 500 million.

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