Hiring a perfect fit and retaining the employee has always been one of the toughest tasks that many big companies face. To ensure that they get a good pool of talent, companies often offer several perks and benefits for employees not only while hiring but also during internal appraisals. One of these perks is ESOPs- Employee Stock Ownership Plan or Employee Stock Option Plan. Experts say that employee compensation has gone beyond the traditional salary package and many companies provide Employee Stock Option Plans to their employees to retain top personnel.
Vineet Patawari-Cofounder CEO StockEdge & Elearnmarkets.com, said that ESOPs encourage a sense of ownership and thus work as a catalyst for teamwork and employee retention. Vishal Agarwal, Co-Founder and CEO of LocoBuzz, said that ESOPs help employees be a part of the wealth generation process as they make proportionate gains when the company grows and scales to new heights.
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“ESOPs provide benefits for employees in many ways. One of them is stock ownership – Employees can get ownership in the firm for which they work since ESOPs allow them to acquire a portion of the company’s share capital. Second is the purchase of shares at a discounted price – Employees often pay a modest amount to purchase the shares granted to them when they exercise their ESOPs. As a result, they can invest in the company at a lower cost,” said Patawari.
Agarwal said, “Employees can benefit greatly from participating in an Employee Stock Ownership Plan (ESOP). It can also provide employees with long-term tax and investment benefits. By receiving a financial stake in the company through an ESOP, employees can gain a sense of ownership and pride in the company’s success, which can lead to increased motivation and engagement. This can improve a company’s performance and may provide employees with opportunities for career advancement.”
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Risks related to ESOPs
Patawari said that when a person chooses an ESOP, he/she is betting that the company’s valuation will improve, but there is always the possibility of devaluation. “ESOPs are taxed in two instances: At the time of exercise – as a prerequisite and when the employee sells the stocks – as a capital gain,” said Patawari.
“Employees should be aware of several risks associated with ESOPs, including stock price risk, diversification risk, leverage risk, and company performance risk. The success of the ESOP depends on the overall performance of the company. If the company performs well, then the ESOP account value will grow, but if it performs poorly then the value may decline. Therefore, employees need to pay extra attention to the company’s performance and growth before going for an ESOP plan,” said Agarwal.
