Employee Stock Option Plan

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Employee Stock Option Plan

  1. 1. ESOP  ESOP: Employee Stock Ownership Plan
  2. 2. What is ESOP? ESOP may be defined as a part of Employee benefit plan under which employees buy, at a ‘fair’ value, the stock of the company and they may become owners of the company for which they work. The concept of ESOP was introduced by lawyer and investment banker Louis Kelso of USA in 1950’s. In India, ESOP comes under existence in 1987. ESOP may comes under AS-15 of ICAI, which is Retirement benefits in Employer’s financial statement.
  3. 3. What is need for ESOP? To buy the shares of a departing owner. To borrow money at a lower after-tax cost. To create an additional employee benefit. Capital appreciation. Incentive based retirement. Tax advantage. Company reduces its tax liability.
  4. 4. How ESOP works? It operates through a trust which is setup by the company . Tax deductible contributions are distributed to individual employee accounts within the trust. Employee with minimum 1 years of service or 1000 hours of work in a year is eligible for ESOP. Employee with minimum 10 years of participation in ESOP and 55 years of age, accounts upto 25% diversification on his/her account. This option continues until age 60, when employee get a one-time option to diversify his/her account upto 50%. Employee receive the vested portion of their accounts at termination, disability, death or retirement.
  5. 5. Major Indian companies using ESOP  Wipro  Infosys  Dabur  P&G  HLL  ONGC  Tata technologies  ICICI Bank  Bharti tele-ventures
  6. 6. ESOP with respect to Wipro WIPRO’s employees together have stock options for 50 lakh equity shares of a nominal value of Rs.2 each. The plan covers executive and non-executive directors but excludes promoter directors. The staff turnover at WIPRO is as low as 4-5 percent against an industry rate of 18-20 percent. This shows the biggest advantage of ESOP, that is, employee retention.
  7. 7. Caveats of ESOP Investors object why employees should be given a stake in the company at fair market value. It dilutes the per share worth of existing investors. Law does not allow ESOP to be used in partnerships. Plan committee members can be held responsible if they knowingly participate in improper transactions. As value of stock appreciates substantially ESOP may not have sufficient funds to repurchase stock. With decrease in value of the company ESOP seems to be less attractive to the employees.
  8. 8. Conclusion Though having some threats, ESOP is advantageous. It is used by the companies to Reward, Retain, Attract talent, Create a sense of Ownership in the company and a Retirement benefit scheme. Hence, it improves the corporate performance as a whole.
  9. 9. Presented By: Group 6 Section D MBA (General) Batch 2006-2008

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