Employee stock options have evolved through time to become one of the most essential tools for motivating employees. ESOP’s have become a popular form of equity compensation by companies nowadays by developing their compensation strategies with flexibility in mind, balancing the interests of employees with the interests of the company. Employee stock options are an integral component of any incentive pay scheme.
ESOP’s are increasingly being used as a must-have compensation instrument by new-age entrepreneurs and successful organizations preparing for future IPOs. Introducing ESOP’s as employee ownership Plan can help to retain employees in the company and reduce the attrition rate of the company. A employee receives a right to participate in the Plan and by a certain number of shares at a fixed price over a certain period of Time. This not only provides financial gains to the employees but also creates a sense of belonging and ownership amongst the employees.
What is an Employee Stock Ownership Plan?
Employee Stock Ownership Plan gives the employees an ownership interest by participating in the Stock /Shares of the Company. The employee gets rewarded with ownership in the company creating a sense of belongingness, Motivation to perform better, thereby resulting in an enhanced contribution to the overall Shareholder’s value.
Different Types of Employee Stock Ownership Plan:
- Employee Stock Option Plan (ESOP)
- Restricted Stock Units (RSU)
- Stock Appreciation Rights (SAR-Equity Settled)
- Phantom Stocks (SAR-Cash Settled)
- Employee Stock Purchase Plan (ESPS)
1: Employee Stock Option Plan (ESOP) and different stages in an ESOP life cycle:
Employee Stock Option Plan is a type of ownership plan which gives the employees the right to buy shares of the Company at a pre-determined price over a certain period upon fulfillment of certain conditions.
It is one of the most traditional mode used to incentivize the employees as it provides flexibility to decide the terms, exercise price, vesting period at the time of grant.
The lifecycle of ESOP includes:
Stage I Grant: Options offered to Employee
Stage II Vesting: Upon fulfillment of conditions options get vested in the hands of the employee.
Stage III Exercise: Employee shows his intention to buy the shares by paying the exercise amount.
Stage IV Allotment/Transfer: Allotment of shares by the Company to employees.
Stage V Sale: Employees sell the shares to any interested buyer.
Applicable Law: Governed by SEBI (SBEB & SE) Regulations, 2021 & Companies Act, 2013.
2: Restricted Stock Units (RSU) and its types:
RSU is another form of Equity compensation plan, which gives employees the right to acquire or receive shares once certain criteria are achieved.
Types of RSU:
- Loyalty RSU
- Performance RSU.
Applicable Law: RSU is included under the preview of Governed by SEBI (SBEB & SE) Regulations, 2021.
3: Stock Appreciation Rights (SAR-Equity Settled):
SAR is a type of Equity Compensation Plan where the holder receives the Appreciation value i.e difference between the Exercise Date price & Grant Date price of the Company, wherein the settlement of such appreciation is made in the form of shares of the Company.
Applicable Law: SAR is also included under the preview of SEBI (SBEB & SE) Regulations, 2021.
4: Phantom Stocks or (SAR-Cash Settled):
Phantom Stocks options are a form of share based employee benefits based on the underlying value of equity shares of the employer company. The settlement of such options is made in cash and not in equity shares of the company and do not involve any actual purchase or sale of the equity shares of the company.
Applicable Law: Not governed under the preview of SEBI (SBEB & SE) Regulations, 2021 & Companies Act, 2013.
5: Employee Stock Purchase Plan (ESPS):
ESPS is a type of Equity Compensation Plan, which gives Employees the right to purchase or subscribe the Shares of the Company at a discounted price. Unlike ESOP options, the Employees are offered “Shares” of the Company.
Applicable Law: Governed by SEBI (SBEB & SE) Regulations, 2021 & Companies Act, 2013.
