Employee Stock Option plan

ESOPs—An  insight

Employee Stock Option plan-often known as ESOPs are the most preferred incentive plan offered by the Employers to the Employees. A survey indicates that 92 % of the organizations prefer to cover select employees in the share-based benefit plan to incentivize the work force. A study shows that 7 out 10 companies have implemented ESOP despite many taxation issues. Tech. companies, Financial services  and diversified Manufacturing  companies take the lead in ESOP. Some Companies go one step further and offer Stock Appreciation Rights Plan (SARP)  it is often rolled back by cash-rich companies where dilution of equity may be a concern

ESOPs are essentially offered as incentives or rewards but employers to their employees. In fact a well designed share based incentive model will meet multiple objectives and benefit both employee and employer. This scheme is indeed innovative in the sense that it motivates the employees of a company to  bond with the company, become participative, accountable and responsible as they emerge as the owners of the enterprise.  This is also intended to reduce the attrition rate as these ESOPs have a lock-in period for three years normally. They tend to think that they are part and parcel of the growth of the company and need to protect the interest and growth of the enterprise and supposed to work for creating more wealth and profits for them and the company as a whole. A survey has clearly demonstrated that this ESOP has indeed shown immediate and desired results such as retention and enhanced performance of employees. Most organizations use employee grade and performance as key considerations for determining the plan size covering only select employees. Fresh issue of shares is most preferred  as source of benefit as 87 % of the respondents issued fresh shares. While in some cases lock in period is also relaxed and the shares are allotted on a price less than the market price to motivate them to accept the offer. The exit could be through Stock Exchanges. Normally 3 % of the paid-up capital is offered under ESOP.A vesting period of one to three years is prescribed.

From the Tax point of view, ESOPs are treated as perquisites for employees and are taxed on the difference of stock’s purchase price and the selling value depending upon the period-either short term Capital gains  (15 %) or Long term Capital gains  (10%)– will apply.

Periodical review and necessary changes be effected  on the ESOP so as to make it attractive and to serve the desired objectives of the Scheme.

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