Employee Stock Option Plan

What is ESOP?

Employee Stock option plan or Employee Stock Ownership Plan (ESOP) is an employee benefit scheme that enables employees to own shares in the company. These shares are purchased by employees at price below market price, or in other words, a discounted price.

The purpose of providing ESOP is to make the employee more committed towards the company. In other words, ESOP motivates the employee to be committed towards the company for a long term and also take ownership of the company.

If the employees are provided with a sense of ownership of the company by making them shareholders of the company, this will result in the employees focusing more on performing better for the company.

However, in order to claim the benefits of the ESOP, the employees have to wait for a certain time period which is known as the vesting period. After the completion of the vesting period the employees can purchase the specified amount of shares.

ESOPs are awarded to employees based on tenure or on performance. Therefore, it serves the following purpose for the company.

1. It acts as a source of motivation for the employees after making them shareholders of the company.

Owning a stock makes them more responsible towards the company and they provide better performance for increasing the value of shares of the company.

2. It helps the business owners in retaining the employees and ensures better performance for their works.

Benefits of ESOP

Following are the benefits of ESOP

1. It acts as a source of motivation for employees who will be benefiting when the prices of the company shares rise in the market.

2. It helps to retain employees in the organisation

3. Employees are benefited for the hard work they perform in trying times.

4. It helps in preventing a significant amount of cash outflow from the company.

This was all about the topic of Employee Stock Option Plan, which is an important topic of Business Studies for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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Frequently Asked Questions on ESOP

How does an ESOP plan work?

ESOP allows the employees to be able to purchase or hold a specified number of shares of the company which can be of a definite price and has some time limitations. The ESOP can be utilised by the employee only after a certain period of time which is known as vesting period.

What is the exercise period in ESOP?

Exercise period means the time period after vesting within which the employee should exercise his right to buy the shares as agreed on terms and conditions of ESOP.

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