Understanding Employee Stock Option Plans (ESOPs) And The Practice

Employees are the most valuable assets in any company. As a result, organizations are always on the lookout for ways of attracting and maintaining talent in today’s increasingly competitive business environment.

One strategy that has been quite popular in maintaining a long-lasting relationship with their employees is Employee Stock Option Plans (ESOPs). But what is it, and how does it work?

What Is ESOP and Why?

ESOP is a business approach to employee-organization relationships that allow employees to own shares or the benefits of owning shares in the organization they are working for.

Owning shares can come on top of or instead of the wages depending on the pre-cooperation agreement. Organizations often apply the ESOPs approach to their key employees in leadership positions.

ESOPs Benefits

The ESOPs offer several benefits to organizations. First, there is an increased employee commitment to seeing the company’s success because they have stakes in it.

If the arrangement involves having the most significant portion of the employees taken care of by their stakes in the company, it would mean that an organization keeps the cash flow internally, which can significantly contribute to growth.

Another reason organizations prefer the ESOPs route is the unavailability of funds to measure up with the salaries some top employees are worth.

Having employees with stakes in an organization can also play a big role in motivating an employee to stay longer. Under some arrangements, organizations allow their employees to do business with them as an incentive to make them more willing to stay at the organization.

Depending on the jurisdiction, the shares earned through ESOPS may be subject to taxation or tax exemptions but may require a variety of considerations.

“You will be safer working with an attorney if you think of using the ESPs approach in your organization,” says business attorney ​​Omeed Berenjian. “ESPs should be considered on a case by case basis to ensure it’s the right decision from a financial, legal and employment perspective.”

The Sare Owning Option

There are two main ESOPs; one is where an employee owns shares, while the other is the phantom stock option plan. The first option involves the employee owning shares, which has three stages. The first stage is granting, which involves signing an agreement between the employer and employee. The employer/company agrees to have the employees get rights to shares after fulfilling some set conditions.

The second stage is the vesting stage. This stage involves fulfilling the terms set out in the granting stage. If the employees fulfill their obligation, they are entitled to the shares outlined in the granting agreement. If not, the company terminates engagement with the employee.

The third stage is the exercising stage, where the employee acquires rights to the shares.

Phantom Stocks Option Plans

In the second type of ESOPs – phantom stocks option plans – the company may not be willing to have employees own shares in their companies. Instead, they offer them a payment indexed on the sales price when the employees meet preset conditions. This contingency-based mode of payment allows employees financial rights to the proceeds of shares and dividends rather than owning the stakes directly.

These ESOP options have become an increasing feature in the American economy and are worth looking at if your organization hopes to attract and keep top talent.

Beatrice Merlin