Employee Stock Option Plans — VIRA Advisors.
Introduction:
Employee stock option plan (ESOP) or Equity incentive plan is the scheme used by the companies to give ownership interest to its employees. ESOP is regulated by Section 62(1) (b) of the Companies Act, 2013 and SEBI (ESOS and ESPS) Guidelines, 1999.The latest amendments in the guidelines were given by the SEBI in 2014 followed by an amendment in 2015.
What is ESOP?
ESOP is an employee-owner method which provides ownership stake to its employees. This method is used by the organization to attract, encourage and retain its employees. The employees are given an option and it does not obligate the employee to accept this scheme.
An ESOP is an option given to its whole time directors and permanent employees the benefit or the right to purchase the stock of the company at a predetermined price.
Why ESOP?
- To attract, reward, motivate and retain employees for high levels of individual performance and for unusual efforts;
- Promote employee ownership culture and reduce the attrition;
- To improve the financial performance of the Company, which will ultimately contribute to the success of the Company;
- Enhances job satisfaction of the employee due to ownership participation;
- Proves to be a good retirement benefit plan for employee;
Benefits of ESOP:
- It keeps the employees motivated as direct stakes are involved.
- It is a ‘kind’ payment, instead of cash.
- It gives a sense of ownership.
Thus giving ESOPs to employees helps the companies and even start-ups to attract potential employees, to retain and motivate the employees.
Disadvantages of ESOPs
The main concern for ESOPs is dilution. With every share granted to the employee the shareholders share gets diluted.
