ESOPs or Employee Stock Ownership Plans are a remuneration benefit offered to employees by their employers — other than the basic pay package. Under the scheme, companies grant employees part ownership in the form of shares, which they can sell after a certain time period.
ESOPs usually come with vesting periods. Which means employees have to work in the organisation for a specific period to own the shares at a preferential price, which is usually lower than the market price. Once the vesting period ends, employees can exercise their options and monetise the shares through a buyback or cash acquisition or even an IPO if the company is unlisted.
Employers use ESOPs to align the company’s growth interests with that of the employees. ESOPs give employees a sense of ownership as their performance, in a way, impacts the stock value and they stand to gain if the company records rapid growth. Employees could also make significant monetary gains, much more than the bonuses and incentives, as the cash payouts are usually done at higher valuations.
In the age of talent wars and high attrition rates, ESOPs can help the employers retain talent. Startups, with limited resources, could also use ESOPs to attract the best talent.
There are different types of ESOPs including Employee Stock Option Scheme (ESOS), Employee Stock Purchase Plan, among others. Under the Employee Stock Option Scheme, employees are granted options with a vesting period and once it ends, they can exercise options to buy shares at a predefined price. While, under the Employee Stock Purchase Plan, employers offer shares to the employees at a lower price than the market value with a clause of minimum service period.
