Under the Employee Stock Option Plan or ESOP, a company provides shares to its employees at a fixed predetermined price as a consideration for their services. In other words, it is a reward for the performance of employees, and thereby a reward to increase their productivity. Generally, the criteria for issuing ESOPs to employees are their length of service, performance, and criticality.
The concept of the ESOP was evolved in the United States in 1950 when Louise Kelso, a lawyer and investment banker, opined that the capitalist system would be stronger if all workers apart from few shareholders, are given ownership interest in companies where they are employed.
Hence, he proposed a plan of granting of company stocks to the employees, which is known as Employees Stock Option Plan. Later, the Employee Stock Option Plan was given the statutory framework in the United States under (ERISA), i.e. the Employee Retirement Income Security Act, 1974. This concept was introduced in India for the first time by Infosys Technologies Ltd. in 1994.
According to the Companies Act, 2013, Employee Stock Option Plan is issued to a permanent employee and director of the company who does not hold, neither himself nor through his relative or through any ‘body corporate’, directly or indirectly, more than 10% of the outstanding equity shares of the company.
There are various purposes of ESOPs. It is used by the company to reward, attract, retain and motivate employees. It is utilized for the purpose of enhancing job satisfaction of the employee and thereby boosting the overall performance of the company. It is also helpful in creating wealth for employees.
Benefits Of Employee Stock Option Plan
Here are some benefits of the scheme for companies as well as their employees:
- Non-Cash Retention Tool– Under this scheme, a company provides the right to exercise its shares to its employees. The compensation provided under the Employee Stock Option Plan is a “non-cash expense” that helps companies in recruiting and retaining employees by offering ownership benefits.
- Productive tool for Startups– A startup puts emphasis upon hiring good talents, as it’s difficult for them, pay high salaries to their employees. Startups use an Employee Stock Option Plan to hire good talent, as they cannot afford to pay very high salaries. Flipkart, Snap Deal and Housing.com are amongst those Indian startups that are offering ESOP to attract talent.
- Realization of Ownership for employees- As employees get rights to exercise the shares which they get from the company, it is believed that it realizes them of a feeling of an owner. Thus, they are encouraged to work more efficiently and effectively.
- A Substitute of Salary– The ‘funds seeking companies’ are not in a position to spend huge money, and therefore, offering ESOP to their employees in lieu of salary would not only provide benefits to companies but also their employees as well.
What Is An Employee Stock Option Plan (ESOP) Policy?
Companies require a written policy that lays down the terms and conditions regarding the eligibility criteria, the price, rights and selling options relating to the ESOPs offered to employees. Such policy is known as an ESOP Policy. It is important to get the ESOP Policy drafted by an experienced lawyer who can understand the company’s requirements and draft a customised Employee Stock Option Plan Policy.