What is ESOP?

What is ESOP? 

ESOP is the abbreviated form of employee stock option programme. It is an employee benefit option/scheme that gives employees an ownership interest in the company. It provides various tax benefits to all the parties involved in the transaction, i.e., the sponsoring company, the selling shareholder, and the employees. This makes the scheme a highly qualified plan for the companies. 

The shares are provided to employees at no upfront cost. They are held in trust for the purpose of safety and growth till an employee resigns or retires from the company. Many times, companies tie ESOP distributions to a vesting plan. Upon completion of the vesting process, the company repurchases the shares. 

What happens after an employee resigns from the company? 

An employee can’t keep or take the shares with him. The shares are bought back by the company and the proceeds from this transaction are transferred to the employee’s account. Further, these shares are either redistributed or nullified (declared void). 

What happens after an employee retires from the company? 

In this case too, the employee can’t keep or take the shares with him. However, the company transfers to him the amount that he had vested in the scheme. 

Significance

ESOP enables companies to raise funds in a short span of time, without losing any control. It forms a part of the employee remuneration package. This boosts the morale of the employees and motivates them to do their work efficiently. Thus, it serves as a corporate-finance strategy to align the interest of employees with the company’s shareholders.