Understanding ESOPS

ESOP can take two forms i.e. Employee Stock Option Scheme (ESOS) & Employee Stock Option Purchase (ESPS),

Under ESOS, employees covered under the Scheme are granted some options , which gives the employee a right to exercise the option at a future date to acquire the equity shares underlying each option

Under ESOP instead of allotting options, the Company directly allots shares to the employees at a pre-determined price.

In case of both ESOS & ESPS, the price at which the shares are allotted is less than the market prices of the shares, to give incentive to the employee in terms of gain at the time of sale of shares. The Company can also provide a lock in period during which the employee cannot sale the shares allotted to them. In some cases, there is also an option to employee to re-sale the shares to the company at a price, which is called as buyback price.

Once the share are allotted to the employee, they also become a member of the Company and can rightfully exercise the rights , which are available to the members under the relevant law.

How ESOS works?

In a general scenario, ESOP Scheme works as follows

01
step


Granting of Options to Employees covered under the scheme

02
step


Vesting of Options in Employees

03
step


Exercise of Options by Employees

04
step


Allotment of Shares underlying the Options

Vesting Period:

The option once granted cannot be exercised by the Employee simultaneously. There is generally a time gap between the day on which option is granted and the day, when it's vested in the Employee, this time period is called as Vesting Period. Once options are vested, the employee gets the right to acquire the shares underlying the options.

Exercise Period:

Once the option gets vested in the employee, than he has to exercise the option vested, by requesting the Company to allot the shares underlying the option vested in the employee. Under some schemes, there is time period within which the employee needs to exercise the Options of the acquired shares , the said time period is called as Exercise Period.

Types of Employee Options

Restricted Stocks (RSUs): - Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.

Stock Appreciation Rights: - Stock appreciation rights (SARs) are a method for companies to give their management or employees a bonus if the company performs well financially.

Performance Shares : - Performance Shares is the method of appreciation for the performance. The goal of performance shares is to tie managers to the interests of shareholders. Their goal is similar to employee stock-option plans, as they provide an explicit incentive for management to focus their efforts on maximizing shareholder value.

Phantom Stock : - Phantom stock is a method for companies to give their management or employees a bonus if the company performs well financially. Phantom stock provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time. Phantom stock is essentially a cash bonus plan, although some plans pay out the benefits in the form of shares. Phantom stock is favored by closely held or family-owned companies who want to incentivize management and other employees without granting them equity.

Benefits of the ESOP

  1. Employees share in the company's capital growth and Reward earned for the skills and talent.
  2. Enhances job satisfaction due to ownership incentive
  3. The shares offered to the employee under ESOP are comparatively lower in cost as compared to the market value of the shares.
  4. Self wealth creation:-The ESOP is a retirement benefit plan also.
  5. Employee Become shareholder of the company and receive high dividend.
  6. Employee can raise their voice in the General meeting.

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