Employee Stock Ownership Plans (ESOPs) are basically rights given to employees of a company. These rights pertain to buying shares of the company at a fixed price on the date of the grant. ESOPs can be in the form of Stock Option Plans, Phantom Equity Plans and Stock Purchase Plans.
ESOPs are the best and most frequently used tools to retain top notch employees in a company. Apart from this, ESOP has various other advantages like:
Usually, companies adopt one or more of the following types of plans. There can be variations in the specific terms to make it relevant to its business needs and objectives:
The selection criteria would completely depend upon the objective of the implementation of the ESOP Plan. Say, if the objective is to use ESOP as a talent retention tool, then you can plan the vesting period to be longer than usual. If your objective is to use it as an incentive tool, you may keep the exercise price low. This would enable the employee to enjoy an upside when he sells off his holding. Again, if your objective is to use it as a part of remuneration mechanism, the eligibility criteria could be accordingly widened.
The organization can have its separate blue print for determining the eligibility criteria for the purpose of this plan.However, there are few statutory eligibility criteria which you have to keep in mind:
A company grants to an employee the option to buy a certain number of shares in the company at a fixed price after a certain number of years (option period). Before the employee can exercise the option he is usually required to complete the vesting period. This typically means that he has to continue to work for the Company for a minimum number of years before part or all of the options can be exercised.
Grant is the act of commitment made by the employer through informing the employee of the eligibility for the Options. This is done by way of sending the Grant Letters to the employees as a part of the ESOP Plan which is in place.
Vesting is the process by which a company grants non-forfeitable rights over the shares of the company. Vesting gives an employee rights to own the shares of the company over time. Vesting basically has two parts – Vesting percentage is the portion of the total options Granted which can be exercised on completion of the Vesting Period.
Exercise is the act of paying the Exercise Price to convert the Options into Shares.
Exercise Price is the pre-determined price at which the options are offered to the employees.
Options are not valid for a lifetime. After a certain period, typically on termination of employee or expiry of Exercise Period, the Options lapse. Lapsed options cannot be converted into shares.
Exercise Period is the period after the Vesting Period within which the employee has to Exercise.
There are two stages of taxability in the hands of the employee which is as below:
Yes, in the hands of the Company issuing the ESOPS, it is allowed to claim ESOP costs as deductions.
There is no statutory limit for this. This completely depends upon the objective of the of the ESOP plan, the frequency of the ESOP grant in the company and company’s internal policies and mechanisms.
Mere grant of an option does not make an employee shareholder of the company. Options are not shares; they are rights to own shares. These become shares only when employee exercises that right.
Yes, they can. However, as per Industry practice, since the shares are not publicly traded, employees need to be provided with an exit option.
Yes, it can. However, the Articles of Association of the company must have such enabling provision.
Constitution of Compensation Committee is compulsory only for listed companies. Private limited companies and closely held companies are not required to form such committee compulsorily.
Yes, there quite a few corporate and legal compliances associated with ESOPs. The laws that dictate implementation of Equity Compensation plans are:
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