As its name suggests Employee Stock Ownership Plan is an extensive employee benefits offering that works as a meaningful way to drive employee satisfaction, motivation and retention.
Whereasthe employee benefit plan such as medical, life and disability insurance plan, retirement benefits plan, paid-time-off benefits provide financial security to employees, Employee Ownership Plan not only cultivatesthe feeling of financial and social security but also nurture the sense of responsibility and commitment towards the organization.
ESOPs are one of the easiest ways to incentivize your workforce. The human resources are the most important assets of an organization. The success or failure of an organization is largely dependent on the caliberand level of motivation of the people working therein
ESOP participation is a reward for years of dedication and hard work and an incentive for future business growth. ESOPs are found in publicly traded and closely held companies of every size, across every industry of the economy.
ESOPs- An Effective Compensation Tool
There is a multitude of reasons for which an employer would give an ESOP to an employee.
The trend of giving ESOPs is more prevalent in start-ups, which cannot afford to provide large compensation packages to its employees. Employee benefit plan is basically a corporate finance tool to:
Negotiate inCTC of existing and prospective employees and
Retain higher talent at a lower price.
By providing an employee with an ESOP, the employer gets the employee vested in the interests of the company and provides the employee with a sense of ownership, thereby, motivating the employee to perform a task with an actual vested interest in the company.
some companies provide ESOPs to employees which can be exercised on a future date, to providean incentivefor a long term commitment by the employee to the company. Various forms of Employee Ownership Plan
Versions forms of ownership plan includeEmployee stock purchase plan, stock options, Restrictive Stock Units, Stock Appreciation Rights and Phantom Stocks.
Employee Stock Purchase Plan allows employees to purchase shares of the companies from their personal money (After tax salary) at a discounted price. Options plan is basicrights given to employees, which entitled them to buy shares of the company at a future date and in a pre-determined manner.
Restricted Stockgives the employees the right to receive shares or equivalent cash compensation on a pre-determined date subject to the occurrence of a specified event or fulfillment of specified conditions.
SAR and Phantom stock, as sometimes used interchangeably, is basically in the form of bonus given to employees that is equal to the appreciation of company stock over an established time period. The primary benefit that comes with SARs is the fact that the employee can receive proceeds from stock price increases without being required to buy anything.
The Author is Legal Advisor-ESOP at MUDS Management Private Limited
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