Last week we talked about some basics of ESOPS or the Employee stock option plans in the Learning and Development Group.

Employee ownership can be accomplished in a variety of ways. Employees can buy stock directly, be given it as a bonus, can receive stock options, or obtain stock through a profit sharing plan. Some employees become owners through worker cooperatives where everyone has an equal vote. But by far the most common form of employee ownership in the U.S. is the ESOP, or employee stock ownership plan. Almost unknown until 1974, about 11,000 companies now have these plans, covering over 13 million employees. This is slowly becoming popular in India as well. It has existed for the executive management, and is now percolating to the operation management and leadership levels as well.

There are some terms commonly used with the plans. Listing these:

  • Grant Date
  • Grant conditions
  • Number of Options
  • Exercise Price
  • Vesting date
  • Vesting period
  • Conditions of vesting
  • Fair market price

Grant date – The grant date is the date when the ESOPs are granted. This is the date when the employee is notified that he / she will be entitled to a certain number of shares.

Grant conditions – Some conditions may be imposed on the grant. This implies that the shares will be released to the employee upon fulfilment of certain conditions. Normally a compensation committee would consider the factors based on which the grant will be awarded. Some of these conditions could be a partial payment requirement, issue at face value rather than market value, grant based on performance of an employee etc. Some condition could be that the employee may not be entitled to sell these for a certain period. To get this grant, the employee will be asked to accord an acceptance to the grant, agreeing in writing (paper or electronic) to the attached conditions, which may include the financial commitment if the plan so provides.

Number of options – This is simply the number of shares granted as the award.

Exercise price – The price an employee is required to pay for the shares, mainly in situations where the issue is at face value or a differential value. Some performance awards may carry a “Zero” price.

We will cover the following next week:

  • Vesting date
  • Vesting period
  • Conditions of vesting
  • Fair market price

Happy weekend.