Employee Stock Option Plan (ESOP)

ESOP known as Employee Stock Option Plan or Employee Stock Ownership plan is a benefit plan for an employee which makes them owners of stock in a company. ESOP shares are part of employees’ remuneration for work performed and it is quite different from other employee remuneration programs.

Under ESOP Scheme employees receive the right to purchase a certain number of shares in the company at a predetermined rate as a reward for their performance irrelevant of the market price and also to motivate employees to keep increasing their performance. They are also used as rewards to the employee for their work.

ESOP has been widely used to reward and retain employees. This scheme is prevalent in IT companies where the employees are considered the most important asset. Narayan Murthy of Infosys has used this scheme to successfully retain employees in the organization and made it quite possible. As the scheme align the interests of a company’s employees with those of the company’s shareholders.

ESOP are widely used to motivate employee to put in their best and give their best and hence helped the company enjoy lower employee turnover and retain its talent in the company. Usually ESOP come with a lock-in period known as vesting period and employees can exercise the options only after end of this period. If the employee leaves the organization before completing the specified period – these ESOP get lapsed and the employee will not get any benefit.

Previously Infosys used to award ESOP to almost all its employees but at present they awarding ESOP’s to selected few employees. Awarding too many ESOP may dilute the promoters’ & investors’ stake which might not always be favorable for them.

Many companies have used ESOP as a technique to raise finance for a wide range of purposes. These purposes can be to rejuvenate a division, to make acquisitions, to take a company private or much other such activity. These types of uses are yet to catch on in India as the scale of ESOP is small for those uses. It’s just a matter of few years; this trend will catch up soon enough in India as well. The numbers of startups in India have gone up drastically and in the next few years we might see these startups using these sorts of schemes for raising capital.

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