List of ESOP Benefits to Employees

Prabhat Nigam

14 Apr, 2022

Introduction

The main reason why an organisation devises an Employee Stock Option (ESOP) plan is to incentivise the employee of the company to perform better. A scheme of an ESOP is designed in such a way that the employee has to stay with the organisation for a certain period before he is able to enjoy the ESOP benefits accruing from such ESOP scheme.

What are ESOPs?

Employee Stock Options^[1] or popularly called as ESOPs, is actually a scheme where the company extends a portion of its shareholding to its senior employees, officers with a view to retain them for longer periods of time. In ESOPs, the company does not straightaway give the shareholding to the employees. Instead it vests a right in them that on a future date, the employees will have an option to purchase the shares of the company at a lower price than market value. 

What are the ESOP benefits in case of employees of a company?

The following ESOP benefits can be claimed by an employee:

1. Helps in wealth creation of employees: ESOPs allow the eligible employees to buy stock of the company i.e. a share in the ownership of the company at a discounted price and sell it later at a profitable rate after a fixed period of time. This time is determined by the employer. In case the timing remains correct and the business of the company does well, then an employee can certainly build wealth through ESOPs. An employee can truly build personal financial wealth through ESOPs. While monthly income and other saving schemes may be sufficient in meeting the daily expenses of the employees but ESOPs give them an opportunity to create a handsome corpus. ESOPs can be considered to be a stepping stone in creating a long-lasting and generational wealth for an individual. 

• Develops a sense of ownership: When an employee receives the ESOP benefits, he gets a stake in the ownership of the company. This means that the employee will have a share in the profits of the firm and feels motivated to perform better because his performance will reflect in the growth of the company and eventually in his profits. This develops a sense of ownership among the employees because they do not feel that they are just workers filling up a position. Instead it provides a sense of belongingness for the workers where they have a real stake in the growth trajectory of the company.

• Ensures Job security: Let us imagine where a scenario where the owner of a company is selling his company to ESOP. In this case the company is less likely to go through turmoil during the phase of transition and not let go a chunk of its employees which happens during mergers and acquisitions. There are no hiccups and the company continues to run like it used to run before the ESOP transition.

The employees also wish for future sustainability of the company especially during times of crisis like covid in 2020. It was witnessed during the covid that many employees at private and publicly owned companies experience much higher rates of lay-offs compared to those companies which provided ESOPs to their employees. The reason behind such fewer lay-offs is that the employers of the companies who provide ESOPs to their employees will have to pay a severance pay at the time of their termination. Therefore, companies where ESOPs are provided have a stronger company culture that helps the business sail through tough times.   

• Increases the trust of the employees in the management: Another important ESOP benefit is that it increases the trust and confidence of the employees in the management and further solidifies the job security and job satisfaction of the employees. By sharing ownership of the company, the employees feel that the management wants to share the benefits of the company with them too and not deprive them of the profits earned by the company. The employees feel that they are not being exploited rather all of them are collectively enjoying the fruits of the hard work.

• Only market available for a minority shareholder: It is important to understand that in companies which are closely held by the majority shareholders and are not listed or having many shareholders, ESOP remains the only place where the minority shareholder can get hold of some shares is only ESOPs. When a company wants to increase its control, it usually offers a handsome some to its employees in exchange of the shares held by them thus bringing huge profits in accounts of the employees.  

Conclusion

From the viewpoint of an employee, ESOP acts as a reward for the efforts made by the employee for a company over a long period of time. The prospective ESOP benefits also link the financial interests of the employee in the success of the company which means that the employees ESOP benefits stands to gain if the company performs better. Mostly, employees work at a lower salary from the market standards and thus take the risks associated with the business. Hence, they should be handsomely rewarded in lieu of the risks taken by them if the business performs better in future.     

Read Our Article:Procedure to Issue Shares through ESOP (Employees Stock Option Plan)