Employee Stock Options

Definition: The Employee Stock Options or ESOs is the compensation scheme, wherein the specified employees or executives are granted a certain number of shares of the company. Here, the employee has the right, but not the obligation to buy the company’s shares at a specific time and a specific date.

SEBI has issued certain guidelines that the companies listed on a recognized securities exchange must abide by. These guidelines are given in the link below:

SEBI Guidelines on Employee Stock Option Scheme

Generally, the employees have to wait for some time before they can exercise their options and such time duration is called as a “Vesting Period”. The purpose of the employee stock option is to give the employees the ownership stake in the organization such that, the interest of both the shareholders and the employees coincide. The shareholders are concerned with the increase in the stock price and as the stock price increases the stock options are issued to the employees and thus everybody works towards the common goal.

The ESOs are the best option than an entrepreneur can adopt as this comes with several benefits:

  • The ESOs come with the vesting period which says, that the employee can exercise the options only after a certain period of time. In case, the employee leaves the firm before its expiration, then the ESO lapses and no benefits shall be given to that employee.
  • When the employees are granted the shares of the company, they develop the sense of ownership and start thinking like the owners rather than the employees. With a share in the profits and direct benefits linked to the increase in the share value, they contribute their best effort towards the overall value creation for the company.
  • The companies who lack cash and cannot give monetary incentives to its employees grant employee stock options. The ESO is the ways of rewarding employees in kind rather than the cash.

The employee stock options are different from the exchange-traded options in the sense these are not traded on the secondary market and hence do not have any marketable value. Also, there is no put option in case of ESOs. Often, employee stock options are given to the employees as a reward for their performance and as a means of motivation for higher productivity.

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