Importance of employee stock option plans as a method of Participation

• Compensation agreements between an employer and employee that include some features of financial options are referred to as employee stock options (ESOs).
• Employee stock options are often thought of as a sophisticated call option on a company’s common stock that are given to employees as a part of their compensation package. Since then, regulators and economists have clarified that ESOs are contracts for pay.
• These nonstandard contracts, which exist between an employer and employee, obligate the employer to provide a certain amount of employer shares when and if the employee exercises their stock options. The duration of the contract varies, and it often contains stipulations that might alter based on the company and the worker’s present job situation. The conditions are outlined in an employer’s “Stock Option Agreement for Incentive Equity Plan” in the United States. This is essentially an agreement that allows the employee to buy a certain quantity of shares at a specified price. The shares that are awarded as a consequence are usually restricted stock. The employee is not required to exercise the option; if they do not, it will expire.
• Senior workers were awarded ESOPs as a form of compensation and recognition for their demonstrable contributions to the business. However, because companies can’t initially afford to pay large wages, ESOPs are being employed as a tool for incentive and reward. With the growth of a thriving startup culture in India, employee stock options have been very popular in the nation recently.
• There are several well-known tales of how Infosys, one of the first firms to provide ESOPs, turned workers into billionaires, including drivers.
• Employee stock option programmes provide workers the option to exchange their salary for a reduced number of business shares, as determined by the employer (less than the market price). The choice offered under this arrangement gives the employee a right; it does not impose a duty.
• The vesting period is the amount of time that employees must wait before exercising their right to buy the designated number of shares. Employees may exercise their options to get shares by paying the pre-established exercise price after they have vested.
• ESOPs are often given out based on an employee’s performance or length of service with the business. As such, it fulfils a dual function for the organisation and the staff.
• Since ownership of shares affects the value of the company’s stocks, it serves as a motivating tool for workers, making them feel accountable for the success of the business.
• It benefits the organisation by assisting in employee retention and ensuring high standards of job performance.
• Benefits of esop
• For small enterprises, ESOPs might be seen as a kind of retainership since they have a lock-in period for exercising the right to buy shares. Consequently, a company may keep its workers. Employees who choose this option must work through the lock-in period in order to be eligible to utilise it.
• Employees feel more invested in the firm they work for when they get shares. They begin to feel like owners of the company rather than just workers. In addition, they get dividends from the company’s revenues, which encourages them to work hard for the organization’s success.
• Employers that are strapped for cash yet are unable to spend large sums of money might give their staff members this choice in place of pay to encourage them to contribute to the growth of the business.
• It’s a non-cash incentive mechanism used to fight for top talent.
• It allows corporations to make payments without seeing a decline in book earnings.
• Employee morale has increased.
• The drawbacks of esop
• The founders’ share holdings are diluted upon the execution of the ESOPs.
• As the corporation is not publicly traded, its private company shares are neither marketable or liquid. As a result, disagreements between employers and workers may arise when an employee departs from the company.
• Conflicts may also arise around the appropriate price to transfer shares and the process of transferring shares themselves.