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.
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.
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.
Major Indian companies using ESOP Wipro Infosys Dabur P&G HLL ONGC Tata technologies ICICI Bank Bharti tele-ventures
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.
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.
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.
Presented By: Group 6 Section D MBA (General) Batch 2006-2008