Employee Stock Option Plan (ESOP):
ESOP’s are becoming popular in India especially for executives in Information Technology firms. In this case, specific type of employees are allotted the company’s shares below the market price. This allotment can be made to employees as an alternative to the bonus payable to them. In case of better financial results the market price of the company’s shares as well as the value of the employees’ shareholdings increases. It can be used as a profit sharing arrangement by which employees receive in addition to wages, company’s shares.
Under the scheme of Employee Stock Option, employees including managers of a company are offered an option to buy shares (stock) of the company of concessional rates. The amount of stock an employee can buy is limited and is dependent upon his pay/wage level. Generally employees are restricted from selling the stock for some time. This restriction period is called as lock in period. The cost of shares is wholly deducted from the pay. Stock option plans are useful for both the employees and the company because:
1. Employees have an extra financial interest in the success of the company. Employees will gain when the company performs well and the stock market price of its shares goes up.
2. Employees have to invest some of their money to buy stock options.
3. Employees can build up a sizeable capital for themselves through regular purchase of stock options.
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