We had discussed about four terms, rather associated terminology of ESOPs in the L & D Group.

We had shared the following definitions related to ESOPs:

  • Grant Date
  • Grant conditions
  • Number of Options
  • Exercise Price

Let’s understand the rest:

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

Vesting date – When an ESOP award is given, normally the shares are not released to the employee immediately. The date when the employee becomes the absolute owner of the shares or a part of them is known as the vesting date.

Vesting Period – This is the period over which the shares will be released in lots. In some cases this is also treated as the period during which, though the award was announced, however the shares did not vest in the employee. So, for a single lot vesting of an entire award, the period is that for which an employee has to wait to get the full ownership.

Conditions of vesting – A number of conditions can be attached to the vesting of shares. One of the most common one is that the employee must be in service on the date of vesting. In a number of cases it can attached to a level of performance / achievement, like total quantum of sales through the employee need to exceed a pre-defined levels. At CXO levels, it may be attached to the unit’s or the organizations performance. It can be a great retention tool as well.

Fair Market Price – This is critical to be recorded with evidence on the date of vesting. This is the price the shares were selling at on the date of vesting. In some cases, the date of selling is used. The purpose of this is to determine the capital gain over and above the consideration paid by the employee.

Next week, I will share a sample plan to help you understand the concept of ESOPs.

Thanks and have fun….