Employee Stock Option Plan (ESOP) is an employee benefits scheme by any company in which the company encourages its employees to acquire ownership of the company in form of shares. These shares are usually offered and allotted to the employees at a rate lesser than the market price. Apart from being an employee benefits scheme, ESOP also tries to align the interest of the employees with the shareholders. It is believed that employees tend to give more focus on the growth of the company as the appreciation in the value of the company increases the share price of the company resulting in creation of wealth for employees as the shareholders of the company.

Who is entitled to ESOP?

The primary eligibility criteria for grant of ESOP are that he or she must be an employee of the company or its group company.

Following categories of employees can participate in an ESOP Scheme:

He or she must be a permanent employee of the company, working in the native country or abroad.

He or she can be a part-time director or whole-time director of the company.

However following employees are not eligible for ESOPs:

An Employee who is a promoter or a person belonging to the promoter group;

A director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than 10% of the outstanding Equity Shares of the Company.

How does ESOP work?

Under the scheme of ESOP, the company allows it’s employees to buy certain number of shares at a predefined price, usually lower than the available market price. The company undertakes the following steps to offer ESOP:

· Firstly, the company drafts an ESOP scheme and gets it approved by the shareholders in their meeting.

· Post approval of the ESOP Scheme, a ‘Letter of grant’ is issued to the employees concerned. This letter contains the details of options granted like share price, vesting period, vesting conditions and so on.

· If any employee is interested in ESOP, he must accept the grant and fulfil the requisite service and vesting conditions.

· The options which get vested can be exercised to convert the vested stock options into the shares of the company.

What are the benefits of ESOP?

ESOP offers several benefits both to the company and the employees.

To the company -

· ESOP creates ownership interest among the employees so they work harder for the benefit of the organization and to appreciate the value of their shares.

· ESOP increases employees’ trust in the management of the company.

To the employees -

· ESOP brings financial benefits in the form of higher pay.

· ESOP gives employees feeling of ownership in the organization and better job satisfaction.