Employee stock option plan

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Employee Stock Option Plan (ESOP)

An Employee Stock Option Plan (ESOP) is an employee benefit scheme that allows employees to acquire ownership in the form of shares. These shares are allotted at a rate considerably lower than the market price, aligning employee interests with those of shareholders. Employees who own shares are more likely to focus on company performance and growth, as the value of their shares depends on it.

Eligibility for ESOPs

  • Permanent employees of the company (working in or outside India)
  • Part-time or whole-time directors
  • Employees of holding, subsidiary, or associate companies (both in India and abroad)
  • Exclusion: Promoters or directors holding more than 10% of the company's equity cannot participate in an ESOP.

Steps to Offering an ESOP

  • Drafting and Approval:
    • The company drafts an ESOP scheme and gets it approved in a shareholders' meeting.
    • Private limited companies, as of 5th June 2015, no longer need to file this scheme with the Registrar of Companies.
  • Letter of Grant:
    • After approval, a 'Letter of Grant' is issued to eligible employees, detailing the number of options granted, vesting period, exercise price calculation, etc.
    • Options are not shares but the right to own shares.
  • Exercise Application:
    • Employees wishing to exercise their option must make an ‘Exercise Application’ to convert their options into equity.

Key Terms in ESOPs

  • Grant:
    • The commitment made by the employer, issuing a 'Letter of Grant' to inform employees of their eligibility.
  • Vesting:
    • The process by which an employee earns the right to own shares over time. These rights are non-forfeitable once vested.
  • Exercise:
    • The act of converting options into shares by the employee.
  • Exercise Price (Strike Price):
    • The predetermined price at which shares are offered to employees, usually below market value.
  • Exercise Period:
    • The time frame after the vesting period during which employees can exercise their options.

Benefits for Employees

  • Financial Benefits:
    • ESOPs provide financial benefits through higher pay, benefits, and wealth generation, offering a comfortable retirement.
  • Increased Responsibility:
    • Holding shares makes employees feel more responsible towards the organization, encouraging active participation in decision-making processes.
  • Job Security and Satisfaction:
    • The combination of monetary and non-monetary benefits leads to better job security and job satisfaction for employees.

Conclusion

ESOPs are beneficial not only for employees by providing financial gains and a sense of ownership but also for companies by aligning employee goals with company performance, fostering a motivated and dedicated workforce.