Employee Stock Option Plans or ESOPs were previously available primarily to the company’s senior executives, but gradually it has now emerged as a reward, motivation to increase performance and right to exercise shares at a fixed, predetermined price, etc. given to employees also. It is not only large companies that utilise the advantages of ESOP, but small companies are also deriving benefits by offering ESOP to their employees.
Through this, the employees have a choice to purchase stock at any point during the period between the dates of offer till the last exercise date. In today’s world, companies are aware of the difficulty in attracting and retaining their talented staff. Top recruiting firms offer meaningful ESOP, which attracts better and skilled employees even though the firms are undergoing a downturn. As employees exercise Employee Stock Option Plans, they usually become more committed to the company’s success and performances.
According to some companies, Employee Stock Option Plan creates motivation and dedication for all employees to work for their company’s growth and thereby bringing a positive impact on its performance in the market. Our Hon’ble Prime Minister unveiled an action plan highlighting various schemes to build a stable platform for the start-ups in the country.
Employee Stock Option Plans seem simple, but if the startup’s employee is not careful or does not understand this concept, it would become difficult to avail benefits contained therein. To understand the benefit of this plan, it is necessary to understand the basics of ESOP. Kapil Bellubi states that a Stock Option Plan is not a share in the company. It represents the opportunity to participate in the company’s shares at some point in time. Every stock option granted to an employee carries the pre-determined price at which the employee can participate or purchase company shares. This price is called the strike price. Mentioning in your job offer letter that you will get ESOPs does not translate into actual ESOPs.
Firstly, Employee Stock Option Plans can be given to everyone who is a ‘permanent employee’ of the company and who is neither a promoter nor belongs to the promoter group. Secondly, the directors of companies, whether whole time or not, are also entitled to ESOP. It is further provided that the director neither by himself nor through his relative nor any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company. Independent directors have also been excluded from the entitlement of the ESOP. Another thing which is there is vesting. The phrase stands for a term and condition under which an employee becomes eligible for stock options.
The concept of Employee Stock Option Plans is indeed gaining sheen in India. Recently, Snapdeal has decided to infuse four per cent additional capital for its ESOP amid soaring valuations and growth in gross merchandise value. Infosys, one of the first Indian companies to offer stocks to its employees in the 1990s, has initiated moves to roll out a new stock incentive plan for top and mid-level executives as part of a strategy to attract and retain top talent. Flipkart has sold a marginal stake worth between Rs 180 crore to Rs 240 crore ($28-36 million) from its employee stock option (ESOP) Trust Fund and has monetised the wealthy for their employees as first of such transaction aimed at retaining talent.
As the cost of all employee benefits continues to increase, companies expand their search for programmes that offer high value for a moderate price. Stock option plans often prove to be a big benefit for employees and cost-effective for companies. While stock options are seldom substitutes for compensation, as part of a robust benefits program, they help make employment packages more attractive.
There are provisions related to Employee Stock Option Plans under the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014 that paved the way for the smooth functioning of ESOP without any hurdles. ESOP is amongst the best salary packages for employees as its value can be much more than their annual income. Also, employees opting for ESOP are not taking any risk as the money is paid only when the option is exercised.
They can exercise the options if the market price of the shares is high and sell them immediately. Otherwise, they can just let the option lapse,” says Ghate. While established companies use this option as a retention tool for their top assets/brains; startups use it as a tool to hire talent, as they cannot afford to pay very high salaries. What makes an Employee Stock Option Plan attractive, other than the value or potential value of the shares or units, is the idea of owning it imparts to the employee holding it.