This document discusses employee stock option plans (ESOPs). It defines an ESOP as an opportunity for employees to purchase company stock at a predetermined price for a stated period, which could be at the market price or a preferential lower price. Key terms like grant date, vesting date and period, and exercise date and price are explained. Companies offer ESOPs to increase employee loyalty and motivation by giving them an ownership stake. ESOPs also improve company performance and provide tax benefits. The document outlines the process of issuing ESOPs through a trust and how ESOPs work to distribute company contributions to employee accounts.

1. Presented by :
Vishakha choudhary

3. WHAT IS AN ESOP?
• Employee Stock Option Plan
• An opportunity to buy stock at a predetermined price some time in future for a stated period
• This could either be at the market price (price of the share currently listed on the stock
exchange), or at a preferential price (price lower than the current market price).
• One of the way of paying variable compensation package
• A reward and motivation for employees

4. IMPORTANT TERMS IN ESOP
• Grant Date – The date of agreement between employer and employee to give an option to own
shares (at a later date).
• Vesting Date –The date the employee is entitled to buy shares, after conditions agreed upon
earlier are fulfilled. This date is also agreed on grant date.
• Vesting Period – The time period between the grant date and vesting date.
• Exercise Period – Once stocks have ‘vested’, the employee now has a right to buy (but not an
obligation) the shares over a period of time. This period is called exercise period.
• Exercise Date – The date on which employee exercises the option.
• Exercise Price – the price at which employee exercises the option. This price is usually lower
than the prevailing FMV (fair market value) of the stock

5. WHY WOULD A COMPANY OFFER AN ESOP?
• When you invest in shares, you do not invest in the market. You invest in the equity shares of a
company. That makes you a shareholder or part owner in the company.
• Owning an equity share means owning a share in the company business.
• Companies offer their employees shares because it is considered that having a stake in the
company would increase loyalty and motivation substantially.

6. IMPORTANCE
• Benefit for Startups to aligns the interest of the employee(s) with the interest of the founders of
the company.
• Improves the financial and operational performance of the company.
• ESOP provide a tax shield for the company.
• It is a better incentive plan for employees.
• Under ESOP, the price of shares available to employees is lower than its market price.

7. EVOLUTION
• Evolved in US in 1950.
• A lawyer and investment banker ‐ Louise Kelso in USA, was of the opinion that the capitalist
system would be stronger if all workers, not just a few shareholders, could acquire and
ownership interest in companies where they are employed.
• He advocated granting of company stocks through a plan to the employees called ESOP.
• Later, the statutory framework for ESOP was introduced in US under the Employee Retirement
Income Security Act (ERISA) of 1974.
• In India, Infosys Technologies Ltd. was the first company to issue ESOP in 1994.

8. PROCESS OF ISSUING ESOP

9. TRUST ROUTE
ESOP scheme drafted and presented in a shareholders’ meeting.
Issuance of Letter of Grant to the employee
Vesting of options
Exercise of options

10. HOW DOES ESOP WORK?
•The ESOP operates through a trust, setup by the company, that accepts tax deductible
contributions from the company to purchase company stock.
•The contributions made by the company are distributed to individual employee accounts within
the trust.
•The amount of stock each individual receives may vary according to pre-established formulas
based on salary, service, or position.
•The employees may "cash out" after vesting in the program or when they leave the company. The
amount they may cash out may depend on the vesting requirements.
•When an ESOP employee who has at least ten years of participation in the ESOP reaches age 55,
he or she must be given the option of diversifying his/her ESOP account up to 25% of the value.
This option continues until age sixty, at which time the employee has a one-time option to
diversify up to 50% of his/her account. This requirement is applicable to ESOP shares allocated to
employee's accounts after December 31, 1986.

11. PURPOSE
• To attract, reward, motivate and retain employees.
• To enable employees to acquire beneficial ownership in their company without having to invest.
• To improve the overall performance of the company.
• To enhance job satisfaction of the employee due to ownership incentive.
• To help in wealth creation for employees.

12. Tax Implications in ESOPS
In this plan, tax benefit can be availed at two stages –
1.On exercise of the option
2.On sale of the shares
On exercise of option, the difference of fair market value and EP will be taxable with the employer
holding the necessary tax. Whereas on the sale of shares, the difference between selling price and
market value will be taxed as capital gains tax. The tax rate varies with the time period for which
the shares are held.

13. WHOM TO ISSUE ESOP

14. ECONOMIC VALUE ADDED (EVA)
• Economic value added (EVA) is a concept used in corporate finance to designate an excess or
lack in value created over the cost of invested capital.
• It is the difference between net operating profit after taxes (NOPAT) and cost of invested or
operating capital.
• The positive value of this performance indicator means that a company is able to cover the cost
of capital and create additional value.
• Negative economic value added indicates that the value of invested capital is being destroyed.

15. CALCULATION
Economic Value
Addition
Net Operating
Profit
Invested capital
Weighted average
cost of capital
- -

16. SIGNIFICANCE OF EVA
(i) EVA is a tool which helps to focus managers’ attention on the impact of their decisions in
increasing shareholders’ wealth.
(ii) EVA is a good guide for investors; as on the baias of EVA, they can decide whether a
particular company is worth investing money in or not.
(iii) EVA is a good controlling device in a decentralised enterprise. Management can apply EVA to
find out EVA contribution of each decentralised unit or segment of the company.
(iv) EVA linked compensation schemes (for both operatives and managers) can be developed
towards protecting (or rather improving) shareholders’ wealth.

17. THANK YOU