The full form of ESOP is Employee Stock Ownership Plan. It refers to a benefits programme for employees that grants them a stake in the company. Employee stock ownership programmes are given out as direct stock, profit-sharing schemes, or bonuses, and it is entirely up to the business to decide who is eligible to participate. Though Employee stock ownership plans are merely options that could be bought at a certain price before the exercise date. Employers must adhere to the guidelines outlined in the Company’s policies when offering employee stock ownership programmes to its staff members.
How Do ESOPs Work?
An organisation offers ESOPs to its employees in exchange for the employees purchasing a predetermined number of shares of the company at a predetermined price following the option period (a predetermined number of years). The pre-defined vesting term must be completed before an employee can exercise his or her option, meaning the individual must continue to work for the company until all or part of the stock options are exercised.
Employee stock purchases through ESOPs are permitted at prices below market value. Additionally, workers can profit from their investments by selling shares acquired through ESOPs. The company is required to buy back the ESOP at fair market value within 60 days if an employee departs or retires prior to the vesting term.
Benefits of ESOPs for Employees
An organisation may offer stock options to its staff as a form of incentive. Employees would be motivated to give their all since they would profit if the value of the company’s shares increased. The main advantages that ESOP offers employers are incentives, staff retention, and rewarding effort, but there are a number of additional important perks as well. Organisations could postpone paying out financial compensation as an incentive by using ESOP options, freeing them from having to pay out cash right away. Awarding employees with ESOPs would prove to be a more practical choice than cash rewards for firms that are commencing their commercial operations on a larger scale or expanding their business.