ESOP is an abbreviation for Employee Stock Ownership Plan, otherwise known as Employee Stock Option Plan. It is a plan used by various listed and unlisted private companies to motivate their employees. It is still a prevalent method that the company uses to lure, encourage and benefit the employees with all needs. ESOP has changed the dynamics of the Indian economy.
ESOPs are generally encouraged by start-up companies as they are unable to pay huge salaries to their employees but are ready to sell the future shares of the company to them. The employer wants the long-term commitment of employees in return for rewards by giving ESOP.
Using this scheme, companies such as Google, Infosys, Paytm, etc., using this scheme, have made their employees millionaires. It has been reported that Infosys, one of the global industry, declared over 5crores shares to its employees in the year 2019 as a part of their reward. It has been recorded as the first company to issue such a huge amount to their employees.
ESOP of a private company can be defined as a plan which is in benefits the employees as it encourages them of their own in the company. It is mostly provided by unlisted private companies or naïve start-up companies with limited finances. ESOP is the right of an employee to take shares of the company at a predetermined price. They receive in the form of salary or bonus plans.
Objectives of ESOP for private companies:
- Attracts and rewards the employees of the company
- Encourage them to work for the growth and prosperity of the company.
The ESOP scheme was first introduced in 1956 in section 2 of the Companies Act. The Companies Act 2013 put this plan into action by laying down some protocols that need to be followed. The protocols for issuing ESOP to employees, according to the Rule 12 of the Rules, 2014, are:
- It can be issued to the permanent employee of the company, in or out of India.
- He should be the permanent director of the company.
- He should be a permanent director or employee of a subsidiary company in India.
*it is not defined, but a person is considered a permanent employee if he works beyond a certain period of time in the company.
It cannot be issued to an employee belonging to different promoter groups and directors who may be holding 10% of the company's equity shares.
Working on ESOP for private companies:
ESOP scheme generally depends on 2 periods-
- Vesting period- It is the date on which the company declares its employees to buy shares. There are no legal rules or obligations attached to it. It can be up to many months. After the vesting period, employees under the ESOP scheme can purchase shares for much less than their market price.
- Exercise period- It is the date when the share of the company is purchased or brought by the employee. At this date, the share is allotted to the employees.
For a listed company, ESOP is known as ESPS (Employee Stock Purchase Scheme). It is defined as a scheme where the employees receive a share of the company as a part of a public issue.
Difference between ESOP and Esops:
ESOP is for unlisted private organizations, whereas ESPS is for listed private companies. ESOP does not attach any obligations while granting shares to its employees at a predetermined price, whereas, in the ESPS, the employees do not have the right to any shares, but they can purchase them at a discounted rate. In ESPS, they accept deductions in their payment.
Benefits of ESOP for private companies:
- It encourages the employees by rewarding them for their work.
- It helps the company to retain loyal employees for a longer period of time.
- It has been seen that the ESOP can be used to save taxes.
- It provides a pension after the employee gets retires.
- It raises the additional capital of the company.
- It prevents the outflow of cash.
- It shares an operating unit of the company with the workers.
As a coin has 2 faces, everything will have both faces, too, i.e. pros and cons. Till now, we discussed the advantages of ESOP, but its disadvantages cannot be avoided. ESOP has a black side too. The companies that do not receive the required profits fail to reward their employees, and instead, they may cut their employee's salaries.
Disadvantages of ESOP for private companies:
- After a certain period of time, ESOP can become an obligation, and the company's liquidity becomes uncertain.
- Sometimes, the ESOP becomes taxable in some companies when an employee exercises the value of his share. It also becomes taxable when he gains profit out of selling the shares.
ESOP should be followed to encourage the employees by paying them with rewards for their loyalty to the company. It motivates the employees to work for the betterment of the company. ESOP of a private company has instilled in the minds of employees that they have the part of ownership in the company and attract various workers during the growth of the company. It is a prime requisite of a skilled and informed person who can spread awareness about the ESOP scheme and its protocols and its various company financial operations. After a few years, the economy of India and other countries will be largely positively affected by the ESOP scheme.
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