Know ESOPs - ESOP Guardian

Meaning &

Origin

Meaning:

A unique method that provides a Company’s workforce with an ownership interest in the company.
The option granted confers a right but not an obligation on the employee to apply for equity shares of the Company.
Stock options are subject to vesting upon which employees can exercise the options to subscribe to the Company’s shares, by paying the predetermined exercise price.

Origin:

Year 1956: Mr. Louis Orth Kelso, a pioneer of the ESOP’s created the first ESOP Plan for a closely-held newspaper chain where the retiring owners sold their shares to the employee.
Year 1979: The U.S. Supreme Court attempted to clarify what constitutes a stock sale within private pension plans, including ESOPs, in the case of “International Brotherhood of Teamsters v. Daniel.”
Year 1980: The United States Securities and Exchange Commission (SEC) sought to further explain the status of employee stock plans. According to the SEC, Employee Stock Ownership Plans were considered securities. However, such stocks did not require registration with the SEC because employees did not purchase ESOP stocks, but were given them by their companies.
By year 2010: 13 million employees in U.S.A participated in ESOPs through 11,000 companies.

Trend in India:

In India ESOP is not used as a Buyout plan but it’s an incentive plan for the employees which helps to increase the retention rate and to reduce the attrition rate.
Indian Companies engaged in IT, Manufacturing and service sectors started implementing ESOPs in the era of 90’s.
Since then, ESOPs have gained importance not only in above mentioned sectors but in varied other fields also.

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Types Of

ESOP

Employee Stock Option Scheme (ESOS)

Employee Stock Option Schemes are the most commonly used form for employee ownership. The option granted under the plan confers a right but not an obligation on the employee. Stock options are subject to vesting, requiring continued service over a specified period of time. Upon vesting of options, employees can exercise the options to get shares, by paying the pre-determined exercise price.

Employee Stock Purchase Plan (ESPP)

Employee Stock Purchase Plans allow Employee to purchase Company’s shares, often at a discount from Fair Market Value. The terms of the Plan determines the tenure and price for possession of the Company’s shares by the Employees. Usually, ESPPs are being framed for offering shares as a part of public issues.

Restricted Stock Units (RSU)

Under Restricted Stock Units Plan, an Employee is awarded with the right to receive shares on a pre-determined date subject to occurrence of a specified event or fulfillment of specified conditions. In such kind of incentive plans, the Employee becomes shareholder only upon occurrence of a specified event or fulfillment of specified conditions.

Stock Appreciation Rights (SARs)

Although, SARs are not technically employee stock options, companies often use them in a like manner. SARs provide employees with cash payments equal to the appreciation of the company’s stock over a specified duration. Thus, unlike other options, SARs provide employees with equity upside without exposure to any downside.

Phantom Stocks

Phantom stock is a form of long-term deferred compensation using the Company shares as the measuring device for calculating the value of the deferred compensation. It simulates the Company shares in everything except that does not represent true ownership. The Company simply credits these phantom shares on its books and as the value of the company shares rises and falls, so does the value of the phantom stock.

Routes of

ESOPS

Steps under the Direct route

Company froms an compensation committee and define the eligibility criteria of ESOPs
Issue fresh shares for ESOPs.
After vesting period employee can exercise the option.
On exercise of an option company issue the shares to the employees.