Employee Stock Ownership Plan: Definition, Benefits and Risk

Many companies in India and around the world offer Employee Stock Ownership Plans as a gesture or a token of appreciation and it also benefits their employee. On top of that it makes the employees and company interests more aligned. This begs the question, what are ESOPs, why do companies offer them to their employees and what are their benefits?

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What are ESOPs?

ESOP or Employee Stock Ownership Plan is an employee benefit plan that gives employees ownership of the company through shares of stock. ESOPs give the company, its shareholders and its employees tax benefits and further align their interests. This way, all of the employees’ hard work can be reflected in their share prices which further motivates the employees to work with full dedication.

How Does An ESOP Work?

To issue an Employee Stock Ownership Plan, a company sets up an ESOP fund. In this fund, the company can either put cash and buy the shares from stakeholders or issue new shares into the fund. The employee then gets shares in the form of ‘Trust Shares’ according to their relative pay. Long-time employees have increased rights to share, which is also known as vesting. Usually, all full-time employees over 21 can participate in the Employee Stock Ownership Plan. This also means that after an ESOP, the employee has some controlling and decision-making rights within the company. When an employee leaves their job, they get the shares, which the company has to buy on face market value but only if the company is not publicly listed. If the company buy the shares then employee gets their shares money directly from the ESOP fund.

Advantages Of Employee Stock Ownership

ESOP have many benefits for the owner and the employees of the company. It act as a means to motivate employees to perform better, which benefits the company and its shareholders and also the employees as now they are also shareholders in the company. Also having a stake in the company means that employees feel more safe and appreciated in the working environment.

How To Cash Out ESOPs?

Vesting doesn’t always mean that you can cash out your Employee Stock Ownership Plan shares. Generally, you can only cash out your Employee Stock Ownership Plans when you leave your company in case of termination or resignation. However, it is worth noting that reimbursement is rarely offered to people below 59 in case of a termination. After leaving you can either sell your shares to the company or if the company is listed then you can trade your share in the market.

Other Types of Employee Ownership Stocks

There are many types of stock options for employee stock ownership plans. Some of the other stock options are:

Direct Stock Purchase Plan– This lets employees purchase shares of their respective company with their own, after-tax money. Many countries offer different plans for employees so that they can buy their company shares at a discounted price.
Restricted stock– This gives the employee the right to receive company stocks as a gift or purchased item after meeting particular requirements such as achieving targets.
Stock Option– This allows employees to buy shares at a fixed time and at a fixed price.
Phantom Stocks– Phantom stocks are a cash price bonus for good employee performance. These bonuses equate to the value of a specific number of shares.
Stock Appreciation Rights– This gives employees the right to appraise the company share prices assigned to a specific lot of shares.

Are ESOPs Good For Employees

Straightforwardly, Yes. Employees’ stock ownership plan shares can generally be considered beneficial to their employees. These programs are usually conducted in companies that tend to stick with their employee rather than changing employees every year. This results in better long-term benefits for the employees who have employee ownership shares. On top of that, the employees with ESOP also become eligible for the dividends companies offer.

Final Thoughts

An Employee Stock Ownership Plan (ESOP) is an excellent way to indulge your employees in the company. It also helps motivate your employees and acts as a token of appreciation. For owners it’s a good way to uplift the company’s performance and the most valued startups in the world has done it time and time again to make a hard-working ecosystem.

FAQs-

1. Is ESOP Part Of The CTC?

A- ESOPs are given at a discounted rate to employees and they are a part of the employee’s CTC.

2. Are ESOP shares good for employees?

A- ESOP shares are good for employees as they provide employees with extra monetary benefits as well as a sense of ownership in the company.

3. What are ESOPs?

A- ESOPs are employee benefit plans which offer the employee an ownership interest in the organisation and other benefits like dividend payments.

4. How can you sell ESOP Shares?

A- At the time of leaving the company, the organisation will buy the shares from you and pay you cash from the ESOP fund. If the company is listed on any share market then you can also trade the shares publicly.

5. What are the types of ESOPs?

A- There are 4 different types of ESOPs: