Home / Employee Stock Option Plan (ESOP)
Updated on 27 May 2020 9.00 AM IST | 4 min read
What is ESOP?
Employee stock option plan is the plan formulated to encourage employees to acquire ownership in the form of shares. In ESOP, the shares are allotted to the employees at a reduced rate than the current market rate. It is done by the companies to attract, motivate and retain the employees. It is basically a contract between a company & its employees that gives right to employees to purchase specific number of shares at a price lesser than the market price within a certain period of time. The fixed price at which the employee purchases the shares of the company is called the exercise price. In case company’s stock price falls below the exercise price, the company revalues the price immediately to retain their employees.
What Is Included In Our Package?
ESOP Glossary Terms
Who Is Entitled To ESOP?
The employees of the company are entitled to the ESOP but company specified certain criteria to make employees eligible for it. ESOP scheme can be claimed by –
Note – Promoters or directors holding more than 10 percent of the equity are not eligible for ESOP.
How An ESOP Works??
The step by step procedure of how an ESOP works is explained below –
Benefits Of Employee Stock Option Plan (ESOP)
Employee stock option plan offers benefits to the company as well as to employees who choose to exercise the option.
Benefits of ESOP For Company
Benefits of ESOP For Employees
ESOP offers several benefits to employees –
- Employee stock option plan brings various financial benefits to the employees of the company such as higher pay, overall wealth generation, other benefits etc.
- Employees feel more responsible towards the organization by holding the shares of the company. They also participate in the decision making process of the organization which make their attitude more positive towards the organization in future.
- After getting both monetary & non-monetary benefits from the organization. Employees feel more satisfied and more secured in job. Therefore, ESOP helps in satisfying the employees too.
Tax Implications Of ESOP
Disadvantages of Employee Stock Option Plan (ESOP)
- The liquidity benefits with ESOP’S is highly uncertain
- The company’s only hope for compensation is indirectly through increased liquidity and through tax advantage sometimes. Therefore, the risk for exercise remains for the same and this can make options riskier than normal stocks.
- There are still many unclear guidelines for valuation & accounting procedures of employee stock option plans (ESOP’S) in a company.