ESOPs- Benefits and Risks

The Employee Stock Option Plan a.k.a. Employee Stock Ownership Plan (ESOP) is a corporate scheme under which a company allows it’s employees to purchase the company shares at a price lower than their actual market value. In case the company is a foreign holding company, it can offer ESOP benefits to its employees through its Indian subsidiary.

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Why do Companies Offer ESOPs?

There are many reasons why companies offer ESOPs to their employees, although they are commonly found in startups. This is because they don’t usually have the capacity to offer attractive packages to the employees. So, they make up for it through ESOPs. Moreover, this allows them to have the employee take a personal interest in the company.

When an employee is availing an ESOP, they are more likely to stick with the company for longer and also feel motivated towards its success.

ESOPs Benefits for Companies:

• Contributions to ESOPs are tax deductible. Thus, a company can borrow money at lower costs.
• Companies can use ESOPs as incentives for their employees.

ESOPs Benefits for Employees

• ESOPs can be highly advantageous when the timing is right. For instance, when Infosys was new and small, it offered many ESOPs to its employees. These employees reaped the benefits when the company became a tech giant years later.
• Employees who plan to work in the company for a long time can earn high profits later.

Disadvantages of ESOPs

• Employees receiving ESOPs get lower basic salary than industry standards, which can be a turn-off for some.
• Just like most kinds of equity shares, ESOPs are risky.
• Employees have to pay taxes when exercising options or selling shares.