ESOP AND DEFERRED PAY-OUTS

ESOP 

Definition -

Employee Stock Option Plan (ESOP)/ Equity incentives are an option plan which is given to the employees by their company as a form of compensation or incentives.

Employee Stop Option Plan (ESOP) is a plan through which a company award Stock Options to the employees based on their performance. Under an ESOP, the employees have right to buy the shares of the company on a predetermined date at a predetermined price.

The basic idea to give employee stock options in early days was to save cash compensations. It was a way to motivate the employees and even to save cash reimbursements for some of the cash strapped companies. These plans are over and above the salary of the employee but not in monetary form directly. Later, the concept of motivation picked up and retention led to spread of ESOP across company verticals.

Different terms used in an ESOP :  

• Grant date: The date on which the company grants an option to its employee.

• Option price: The price at which such shares in a scheme in a scheme are offered. It is also known as the 'strike price' or 'grant price'. Normally such option price would be below the market value/fair value of the shares on the date of grant.

• Vesting date:  An ESOP would provide for a date on which an option is vested with employees and time frame over which the stock option would vest with employees ('Vesting period').

• Exercise period:  The employees would be given a time period, called exercise period, within which they are required to exercise the option. The date on which employees exercise this option is known as 'exercise date'.
• Create a Trust (Special Purpose Vehicle): Depending on the number of options to be given to the employees, the company will issue shares or options to the trust. The trust would need funds to buy these shares. For this, the company can either gift soft loans from its own funds or the trust can raise loans through other sources to meet its financial requirement.

Objectives of ESOPs

The objectives of ESOPs are as follows:

1. To make improvement in the individual and group performance 
2. Act as a retention tool
3. To bring the sense of commitment and belongingness
4. Maintain loyalty due to the factor of ownership
5. To create a vibrant culture of ownership
6. It is another form of reward or compensation