Corporates are figuring out new ways to provide incentives and perks to their employees and one which does not actually affect their company capital. One of the most popular of this is the Employee Stock Option, most popular in the western countries, the ESO is one of the preferred methods to encourage the employees. An ESO is essentially a piece of the ownership of the companies issued to the employees.
What is ESO?
Employee stock options (ESOs) are a kind of share remuneration offered to staff and directors by firms. Instead of immediately distributing shareholdings of the enterprise, the corporation grants derivatives rights on the equities.
These rights are similar to conventional call options in that they allow the employees the right to purchase the company’s stock at a predetermined rate for a limited timeframe.
Employees might be given stock options by a corporation. This gives employees an incentive to offer more to the organisation and motivates them. It also aids in the long-term retention of staff in the organisation.
The personnel are the most important aspect in the organization’s growth. Their contributions might be rewarded by offering equity to individuals.
Employee Stock Option Plans (ESOs) and Sweat Equity Shares are two means for a corporation to issue shares to its employees. The corporation can also expand its assets by issuing the stock.
The regulations of the Companies Act of 2013 and the Companies (Share Capital and Debentures) Rules of 2014 govern the issuance of both ESO and Sweat Equity Shares.
Employee stock options (ESOs) are a type of stock-based remuneration paid for by corporate businesses to its employees. Vary from state to state, the method for issuing ESOs may vary.
However, in overall, ESOs are ruled by a contract which grants qualified people the opportunity to acquire shareholdings in the company in the long term at a pre-determined value (referred to as the “option contract”), or share capital are issuance to personnel via profit-sharing schemes or incentives, and the employer has the freedom to ascertain who can obtain the opportunities.
Eligibility Criteria for Employee Stock Option Issuance
For an individual or employee to be eligible for ESO certain guidelines have been laid under which, an employee can only be eligible for ESO issuance if;
1. He/ She is a permanent employee of the company bound by a contract, and may be employed for the company in India or abroad.
2. He/ She is a corporate director that typically includes a full time/ part time Director but not an independent Director.
3. He/ She is a regular Employee or Director of a conglomerate, holding company, or associate firm in India or outside India.
That being said there are certain conditions under which a personnel may be ineligible for Employee Stock Option, and they are:
1. Employee who is a member of the promoter group or a corporate promoter.
2. A Director who, actively or passively, owns more than 10% of the firm’s issued share capital, possibly personally or via a corporation or a family.
An Employee Stock Option is particularly prevalent and it is solely because of beneficial nature of it. The benefits attached with ESO equally profits the company and the employees, while employees can have a stake in the company, the companies do not have to incur the extra financial burden to incentivise their employees.