One of the earliest Indian companies to introduce the concept of the Employee Stock Ownership Plan (full form ESOP) was Wipro in the year 1985. But, it did not catch the public eye right away.
Yes, you read it correctly!
ESOP concept has existed in India since the ’90s and it was Infosys that is credited with its publicising in the 1990s. Since then, it has been a shining investment option for employees pertaining to a number of advantages.
So, what is ESOP?
How does ESOP work?
Is ESOP good for the employees?
Intrigued to be an informed employee?
Well, read the blog and get sorted!
In financial terms, ESOP or an employee stock ownership plan is defined as a benefit provided to the employees of an organization wherein they get an opportunity to purchase the company shares (they are working in) at a discounted price.
ESOP can be understood as a type of reward offered by the company to its loyal employees for good work. Further, ESOP acts as an encouragement to the employees as they get to own a portion of the company and as it proceeds on the path of success, its stock price also increases which benefits them in the long run.
Therefore, it is very crucial that the employees of the concerned companies are aware of ESOPs and must know the purpose behind them. Although the trend was started by IT firms mainly, now even startups are utilizing the concept of ESOP to lure talented individuals into their organization.
Generally, there are 3 categories of price on which the stocks can be offered through ESOP and they are:
The market price of the company’s stock listed on the stock exchange
The preferential price is often lesser as compared to the market price
Lastly, the price set by management (usually this option is used by firms that are not listed)
The working of ESOP in any company is governed by guidelines mentioned under the Employee Stock Option Scheme and Employee Stock Purchase Scheme. The first and foremost thing that employees need to understand is that ESOP is a benefit and not an obligation for them. They can offer in the forms of Stock Purchase Plans, Stock Option Plans or Phantom Equity Plans.
After performing in the company for a specific period of time, the employees can first pay the required and pre-determined price (stock price set for ESOP) and can exercise the right of subscribing to the shares of the company.
The ESOP lapses either after the expiry of the Exercise Period or when the employees no longer work with the company. In this way, the employees get to have a portion in the company they work in and the employer avails tax benefits. Also, the path of ESOP enables the companies to prevent cash outflow.
Therefore, both parties gain some of the other advantages.
The advantage of ESOP for employee and employer are illustrated below:
● They get financial reward based on their performance
● It gives them a sense of ownership in the company they work for.
● It establishes improved communication between the employer and employees
● The employees become more aware of the decisions and plans of the company. Hence there is an increased involvement.
● They get a long-term association of employees in the company
● Start-ups offer ESOP to attract a talented individual to work in their companies
● It increases the productivity of the employees which in turn benefits the company
● Companies can even dilute the stock ownership in times of need and save money ● Most importantly, companies get to avail substantial tax benefits
ESOP is primarily given to the employees who are permanent in the company or any of its subsidiaries. Therefore, people who are either working part-time or as contractors or counsellors are not eligible to avail of this benefit offered by the companies. Further, the board of directors are also eligible for the same.
I hope after reading this blog you are more informed about the concept of ESOP and what are the associated benefits. For more interesting knowledge related to finance, please follow our blog section regularly!