An employee stock option plan (ESOP) is a type of employee benefit plan which is
intended to encourage employees to acquire stocks or ownership in the company. Under
these plans, the employer gives certain stocks of the company to the employee for
negligible or less costs which remain in the ESOP trust fund, until the options
vests and the employee exercises them or the employee leaves/retires from the company
or institution. These plans are aimed at improving the performance of the company
and increasing the value of the shares by involving stock holders, who are also
the employees, in the working of the company. The ESOPs help in minimizing problems
related to incentives.
Today, ESOPs are an integral part of executive compensation. ESOPs are now spread
across the IT, services and manufacturing sector. Such stock based compensation
involves granting some ownership stake in the company to its employees hence synergizing
interests of the employees and the company.
Though increasing ownership in the company, it puts “a lot of eggs in one basket”.
While you may be justifiably proud of your ownership in your company and like to
see it grow as you work hard, holding a concentrated position in a single stock
comes along with an opportunity cost and liquidity risk. The performance of your
wealth is dependent on various factors, not the least being how the industry shapes
up and how the market values the stock. As you keep working with your company, your
intellectual capital (technically speaking, the present value of all your future
earnings from the company) still remains tied in with the fortunes of your enterprise.
Hence, it may be a wise idea to appropriately distinguish between your intellectual
capital and financial capital and manage them according to the risk-return parameters
inherent in them.
As you begin to think about managing from your concentrated exposure, you will
need access to independent and well researched advice on strategy (whether to use
futures and options, what quantum to bring into play), low-cost financing for the
exercise, compliance timings (to avoid insider trading) and a carefully planned
diversification strategy. At KFintech , we have the best in class team to assist you
in all aspects of managing your ESOPs.
At KFintech, we assist the corporate in implementing ESOP Schemes in compliance
with SEBI ((Share Based Employee Benefits) Regulations, 2014. Our scope involves
assisting the corporate in setting various parameters like; number of options to
be granted, vesting schedule, exercise price, etc. advising on drafting of various
resolutions required to be passed and drafting of the scheme and obtaining in-principle
approval from the Stock Exchanges.