An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization. Employee stock ownership plans are issued as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in deciding who could avail of these options.
However, Employee stock ownership plans are just options that could be purchased at a specified price before the exercise date. There are defined rules and regulations laid out in the Companies Rules which employers need to follow for granting of Employee stock ownership plans to their employees.
1. Employee Stock Option Scheme (ESOS)
An employee stock option that grants specified employees of a company the right to buy a certain amount of company shares at a predetermined price for a specific period.
2. Employee Stock Purchase Plan (ESPP)
An employee stock purchase plan (ESPP) is a ESOP program in which employees can purchase shares at a discounted price. Employees contribute to the plan through deductions to salary, which build up between the offering date and the purchase date. At the purchase date, the company uses the composite amount to purchase shares in the company on behalf of the employees.
3. Share Appreciation Rights (SAR) / Phantom Shares
A stock appreciation right (SAR) is a bonus given to employees that is equal to the appreciation of company stock over an established time period. Similar to employee stock options (ESO), SARs are beneficial to the employee when company stock prices rise; the difference with SARs is that employees do not have to pay the exercise price, but receive the sum of the increase in stock or cash. The primary benefit that comes with SARs is the fact that the employee can receive proceeds from stock price increases without being required to buy anything.
Benefits of ESOP
Stock options are provided by an organization as a motivation to its employees. As the employees would benefit when the company’s share prices soar, it would be an incentive for the employee put in his 100 percent. Although motivation, employee retention and awarding hard work are the key benefits which ESOP brings to the employers, there are several other noteworthy advantages too.
With the help of ESOP options, organizations could avoid the cash compensations as a reward, thus saving on immediate cash outflow. For organizations which are starting their business operations on a bigger scale or expanding their business, awarding their employees with ESOPs would work out to be the most feasible option than the cash rewards.