I hope the understanding of the terms for ESOPs will be good with you.

We covered the terms in the following posts and the  in the L & D Group:

Like I had mentioned last week, I am sharing a sample plan. This is an actual plan that was awarded to me. I will keep the confidential stuff out of this, but will give the overall structure, which will help you understand how an ESOP can be configured.

In 2012, I delivered a phenomenal result to my organization on the Six Sigma / process improvement initiatives. Based on this, in the month of April 2013, I was awarded 750 shares in my company.

This was the award given to me. But I did not get those shares. There was a vesting schedule which was given to me, which was as under:

  • 10% – after year 1 – 75 shares
  • 20% – after year 2 – 150 shares
  • 30% – after year 3 – 225 shares
  • 40% – after year 4 – 300 shares

So, my company did reward me for my work, and this was over and above the reflections in the bonus and increments given to me. They also attempted to create a long term interest in the organization for me.

These shares were allocated free of cost, however the condition was that based on a defined date, at the completion of each of these 4 years, I have to be in active employment with the organization. Thus my total vesting period was 5 years, and my interest grew with the length of my service with the organization. The terms were simple – a percentage was vested in me each year, provided I did not leave the organization.

In some cases, I have seen terms being included, like even after vesting, the employee cannot sell the shares for a period of time, say 2-5 years. This restriction leads to another term, called – Payment Period. So the payment period defined in the award will be 2-5 years as specified.

Now, on the date I would get my 1st vesting, i.e. 75 shares, the market price would be the fair market price for these shares, based on which my taxes will be computed when I sell those shares.

Now this award was a post facto award, where it was given to me after I had achieved some results. I was unaware of this award, till the point I actually got it.

Some plans associate conditions to the grant. So, the award committee will put a precondition, say based on sales / business procured for the organization, like, the grant of ESOPS will be 1000 shares per million dollar sales achievement. There could be a separate set of vesting conditions attached.

Friday has started, and the weekend is over the shoulder – Enjoy and have fun….

More next week.