What is ESOP?
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Employee Stock option plan or Employee Stock Ownership Plan (ESOP) is an employee benefit scheme that enables employees to own shares in the company. These shares are purchased by employees at price below market price, or in other words, a discounted price.
The purpose of providing ESOP is to make the employee more committed towards the company. In other words, ESOP motivates the employee to be committed towards the company for a long term and also take ownership of the company.
If the employees are provided with a sense of ownership of the company by making them shareholders of the company, this will result in the employees focusing more on performing better for the company.
However, in order to claim the benefits of the ESOP, the employees have to wait for a certain time period which is known as the vesting period. After the completion of the vesting period the employees can purchase the specified amount of shares.
ESOPs are awarded to employees based on tenure or on performance. Therefore, it serves the following purpose for the company.
1. It acts as a source of motivation for the employees after making them shareholders of the company.
Owning a stock makes them more responsible towards the company and they provide better performance for increasing the value of shares of the company.
2. It helps the business owners in retaining the employees and ensures better performance for their works.
An ESOP is an employee benefit plan that enables employees to own part or all of the company they work for. at fair market value (unless there’s a public market for the shares). So, the employee receives the value of his or her shares from the trust, usually in the form of cash.