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All you need to know about ESOPs

Today’s world is full of competition and that is the main reason employers are seeking to attract and retain talent. They are going beyond the traditional pay like allowances, base salary, and special packages. One such remuneration is ESOP. In this article, we will learn more about ESOP.

ESOPs or Employee Stock Ownership Plans are remuneration benefits provided by the employer to their employees apart from the basic pay package. Under this plan, companies give their employees part partnership in the form of shares, which they can sell after a specific period.

Generally, ESOPs come with a vesting period. It means an employee has to work for a specific time to own the shares of the company at a special price which is usually lower than the market price. After the vesting period ends, employees can exercise their options and monetize the shares by buyback or cash acquisition, or an IPO if the company is unlisted.

Companies use ESOPs to line up the growth interests of the company with that of the employees. Employees get a sense of ownership through ESOPs as their performances, in some way, affect the stock value. Also, if the company records rapid growth, they get to gain. Further, Employees can make notable monetary gains that are much more than bonuses and incentives as the cash payouts are done at a higher valuation.

The use of ESOPs can help companies to retain talent in a world full of talent wars and a high attrition rate (the rate at which people leave). It is beneficial to use ESOPs for startups that have limited resources to attract the best talent.

There are different kinds of ESOPs which include Employee Stock Option Scheme (ESOS), Employee Stock Purchase Plan, and many more. In the Employee Stock Option Scheme (ESOS), employees are given options with a vesting period and after it ends, they can exercise their options to buy shares at predefined prices. On the other hand, under the Employee Stock Purchase Plan, employers provide shares to the employees at lower prices than the market price with a section of the minimum service period.

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