Home/Blogs/ESOP: Meaning, Benefits And How It Works

ESOP: Meaning, Benefits And How It Works

equity market
15 May 20246 mins readBy MOFSL

Introduction

ESOP’s full form is the Employee Stock Ownership Plan. ESOP has gained popularity in the corporate sector in recent years. It allows you to own shares of the firm you are employed in and benefit from the growth in their value over time. Besides benefiting you as an employee, ESOP improves the company’s overall performance since it develops a sense of ownership and responsibility in you towards it. Let’s dive deeper into the ESOP meaning, its benefits and working. 

 

What is ESOP? 

ESOP is an employee benefit plan where you are incentivised with an ownership stake in the company in which you are employed. Under the plan, a firm allocates a certain number of shares to eligible employees at a grant price or exercise price. However, you have to wait for a certain period, known as the vesting period, to convert your ESOP benefit into stock. The purpose of ESOP is to make you more committed towards the organisation you work for. It acts as a corporate finance strategy and an employee benefit plan. 

 

How does ESOP work? 

The first step in ESOP is setting up an ESOP trust that serves as the custodian of the allocated shares on the employees’ behalf. Once a company establishes an ESOP trust, it allocates a certain number of shares to eligible employees at a set price. 

The shares allocated are subject to a vesting period. You are expected to work in the firm for the vesting period to exercise your ESOP and avail ownership of shares. The date when the vesting period ends is known as the vesting date. Once the vesting period is over, you can exercise your ESOP partially or completely by buying the allotted shares at the exercise price which is usually lower than the market value. The allocated shares remain with the trust during the vesting period. 

Exercising your ESOP can help you become shareholders in the firm and make financial gains if the share value increases. You can also sell the shares purchased via ESOP and earn profits. In case you leave or retire before the vesting period, the company must buy back the shares at a fair market price within sixty days. 

Let’s consider an ESOP example to understand how ESOP works and what are ESOP shares:

Mr. Kumar works for ABC Ltd., which offered him an ESOP benefit. The company offers him 1000 shares for INR 300 per share (exercise price). The vesting period is four years.

So, after completing four years from the grant date, Mr. Kumar can buy 1000 shares at INR 300 per share even if the share price increases in the future.  

 

Benefits of ESOP 

ESOPs provide a range of benefits to both employers and employees of a company. A prominent benefit of ESOP for the employer is enhanced employee motivation and loyalty arising from an ownership stake in the organisation. When you know that you will be incentivised for your company’s success, you feel motivated to put in the best efforts. This increases the efficiency and overall performance of a company. ESOP also helps in employee retention since exercising the ESOP option is possible only after completing the vesting period. 

As an employee, you can enjoy ownership in the firm you work for at a lesser cost than others. This is because ESOP allows you to buy company stocks at a set price, which is usually lower than the market value. If your firm grows tremendously in the future, holding the shares for a longer period can help you earn significant profits. Furthermore, an ESOP can provide you with additional income through dividends. 

 

Wrapping Up

ESOPs serve as effective tools for companies to attract, retain, and motivate employees. By offering employees an ownership stake in a company, employers can ensure a higher sense of responsibility and dedication from employees towards the company’s growth. As an employee, you can acquire ownership of the organisation in which you are employed at lesser costs. 

 

Trending Blogs: NSE Holidays 2024 | BSE Holidays 2024 | Invest in Small Cap & Mid Cap Mutual Fund & Stocks | Companies affected by Rise in Crude Oil Price | Fall in IT Stocks | Launch of 4 New Indices | Revised Lot Size of Nifty Contracts | Impact of RBI Circular on Currency Trading | RBI’s New Lending Guidelines | Electric Air Taxis in India

 

Financial Calculators: SIP Calculator | SWP Calculator | Compound Interest Calculator | EMI Calculator | FD Calculator | Retirement Calculator | Option Value Calculator | Inflation Calculator | Lumpsum Calculator

 

Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price

 

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C
Click here to see your activities