What are ESOPs?

Contact Us
What are ESOP's?

What are ESOPs?

An employee stock ownership plan is a well-defined-contribution employee benefit plan designed to invest primarily in the sponsoring employer’s stock. In other words, ESOPs are meant to provide advantage to both the employee as well as the employer, in which an employee mainly invests in the stock of the sponsoring company by purchasing a fixed number of shares of the company at an amount that is lower than the market value and then vest it after certain number of years, known as option period. The idea that employees should have an ownership stake in the company led to the emergence concept of the Employee Stock Option Plan (ESOP). 

The objective behind the introduction of ESOPs is to provide an incentive to attract, retain and reward employees of the company and motivate them to contribute towards the company’s growth and profitability. However, ESOP shares  are a part of employees’ remuneration for work performed andthe company may hold the provided shares in a trust for safety and growth untilthe employee retires or resigns from the company.

An option in stock option plan gives the employee, the choice to purchase the shares of the company on the fulfillment of the conditionsmentioned in the ESOP plan at the price decided at the time of granting  the  options. Grant and vesting is a commonterminology used in relation to ESOPs. The eligibility of an employee(depending on the criteria set) to grant the stock options is based on his roleand performance, known as grant of option. On the other hand, Vesting ofthe ESOP   provides  the right to the employees to own certainshares over the period of the time. It has two components – Vesting percentageand vesting period. Vesting period is the period on completion of which thesaid portion can be exercised. Vesting percentage refers to that portion oftotal options granted, which the employee will be eligible to exercise. Thereshall be a minimum period of one year between the grant of options and vestingof option.

But the question is can ESOPs be transferred? The option granted to employees shall not be transferable to any other person, pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.

Share this post?

Team MN & Associates