ESOPs are Employee Stock Ownership Plans where a trust holds and stock of the employers for the benefit of the employees. Primarily, the trust acquires the stock from the employer or from the shareholders of the employing company that has floated the stock in the market. Basically, it is a retirement plan that is loaded with tax advantages. When you retire, you would benefit like all the other employees from the stocks that the trust has held.
Stock Option means a right but not on obligation granted to an employee to apply for the company stock (shares) at a predetermined price. The scheme is generally called “Employee Stock Option Plan (ESOP)”. There are many reasons :
1. It is a tremendous motivator and can get employees highly involved in their jobs and focused on corporate performance.
2. It is vital tool to attract and retain quality employees, fostering in them long term attitudes.
3. As a compensation tool, ESOPs offer rewards that can exceed the expectations of employees but are still affordable to the company as they are highly performance driven.
4. Internationally, ESOPs are used for granting retirements benefits to employees and as succession plan for owners.
5. Increasingly, sheer competition dictates setting up ESOPs for employees.
6. Strategically, economically, financially or philosophically ESOPs are a win-win combination.