• 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.