Our Authors talked about ESOPs in the Learning and Development Group yesterday.

ESOPs – Employee Stock Ownership Plans

A Definition: ESOPs, Employee Stock Ownership Plans, also known as Employee Stock Option Plans are plans to provide an ownership stake to employees, especially senior employees, in the organization, at a concessional / differential / book value price, as an incentive, giving a sense of ownership and belonging to the employee, without payment of cash.

Award Conditions: These shares are normally awarded on fulfilment of certain conditions, which may include performance, retention, duration of service, innovation, role criticality and a multitude of reasons.

Benefits: The main benefit for the employee is the ability to have a share in the company’s success. Due to the tax benefits, the administration of ESOPs is regulated, and numerous restrictions apply, which vary from country to country. Sometimes, there are awarded as a retirement plan as well to tenured and senior employees.

The benefits for the company include increased cash flow, tax savings and increased productivity from highly motivated workers. Often they act as a good retention tool. ESOPs are often used as a corporate finance strategy.

Employee stock ownership plans can be used to keep plan participants focused on company performance and share price appreciation. By giving plan participants a vested interest in ensuring that the company’s stock performs well, these plans are believed to encourage participants to do what’s best for shareholders. Since the participants themselves are shareholders, they work towards increasing the market caplitalization and the performance of the organization.

Taxability: These incentives in most countries are liable to be taxed in one form or the other, like a perquisite tax, or an income tax etc.

Next week, I will share various terms associated with ESOPS, and at least one sample plan.

esop

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