In today's world, employees are not just limited to receiving paychecks. To incentivise employees to work harder and pledge their loyalty to the company, employers have started using Employee Stock Ownership Plans, or ESOPs, as a successful tool. So what does ESOP mean in the share market?
An ESOP is an employee benefit plan designed to grant ownership stake to employees. In an ESOP, the company allocates a small share to the employee, which is kept in the ESOP trust fund. The employee can build up his ownership over time and also have gains.
ESOP schemes can be beneficial for both the employer and the employee.
Now that we know what an ESOP scheme is let us see how it works.
The first step is for the company to create a separate trust fund, specifically to hold the company's stocks on behalf of the employee.
The company then contributes to the ESOP trust to buy the shares. The contribution could be in the form of cash, stocks, loan or a combination.
Individual employees are then chosen to allocate the ESOP stocks.
The day the employee agrees to own stocks under the ESOP scheme, a grant date is given. From this day onwards, the vesting period begins. During the vesting period, the employee must stay employed in the company in order or lose the right to exercise their ESOPs.
Once the vesting period is over, the stocks are transferred to the employee's account within the trust fund.
Employees can now buy the stocks at a much lower rate than the fair market value or sell their shares.
ESOPs foster employees' loyalty, commitment and innovation - all that is needed to push a company towards success. Employees can also be a part of the company's success and earn dividends if it does financially well while diversifying their portfolio.
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With ESOPs, companies allocate stocks to employees and give them partial ownership of the company. Employees have to wait until the vesting period to exercise their ESOPs.
ESOP shares are allocated to the employee's account within the ESOP trust fund.