- An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization.
- Employee stock ownership plans are issued as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in deciding who could avail of these options.
- However, Employee stock ownership plans are just options that could be purchased at a specified price before the exercise date.
- There are defined rules and regulations laid out in the Companies Rules which employers need to follow for granting of Employee stock ownership plans to their employees.
- An organization grants ESOPs to its employees for buying a specified number of shares of the company at a defined price after the option period (a certain number of years).
- Before an employee could exercise his option, he needs to go through the pre-defined vesting period which implies that the employee has to work for the organization until a part or the entire stock options could be exercised.
Why Company offers ESOPs to their employees?
- Organizations often use Employee stock ownership plans as a tool for attracting and retaining high-quality employees.
- Organizations usually distribute the stocks in a phased manner.
- For instance, a company might grant its employees the stocks at the close of the financial year, thereby offering its employees an incentive for remaining with the organization for receiving that grant.
- Companies offering ESOPs have long-term objectives. Not only companies wish to retain employees for a long-term, but also intend making them the stakeholders of their company.
- Most of the IT companies have alarming attrition rates, and ESOPs could help them bring down such heavy attrition Start-ups offer stocks for attracting talent.
- Often such organizations are cash-strapped and are unable to offer handsome salaries.
- But by offering a stake in their organization, they make their compensation package competitive.
What are the Benefits of ESOPs for the employers?
- Stock options are provided by an organization as a motivation to its employees.
- As the employees would benefit when the company’s share prices soar, it would be an incentive for the employee put in his 100 percent.
- Although motivation, employee retention and awarding hard work are the key benefits which ESOP brings to the employers, there are several other noteworthy advantages too.
- With the help of ESOP options, organizations could avoid the cash compensations as a reward, thus saving on immediate cash outflow.
- For organizations which are starting their business operations on a bigger scale or expanding their business, awarding their employees with ESOPs would work out to be the most feasible option than the cash rewards.