Definition: The Employee stock option scheme or ESOs is the form of executive compensation, wherein the selected executives are given a certain number of shares of the firm. Here, the employees have the right, but not the obligation to buy or sell the company’s shares at a specific date and at a specific time.
The companies listed on the securities exchange must comply with the SEBI guidelines on employee stock option scheme. These guidelines are:
- Eligibility: An employee can participate in the ESO scheme if he satisfies the following:
- He is not a promoter or,
- He is not a director who directly holds 10 percent of the outstanding equity shares.
- Compensation Committee: No employee stock option scheme could be initiated until and unless the compensation committee has been formed. This committee comprises of the board of directors wherein the majority should consist of independent directors, who supervises and gives advice on the ESO scheme.
- Shareholder Approval: It is mandatory to get the approval of the shareholders of the company before offering the ESOs to the employees. The approval can be acquired through a passing of a special resolution.
- Pricing: The company making an offer of ESOs to its employees has the right to determine the stock’s exercise price provided, it conforms to the accounting policies as specified in the SEBI guidelines.
- Lock-in-Period and Rights of option holder: There must be a time gap of one year between the granting of the options and the vesting period (time for which the employee has to wait to exercise his option). Until the shares are issued upon exercise of the option, the employee shall have no rights as that of the shareholders.
- Accounting Treatment: The option’s accounting value can be determined either through the Black-Scholes model or as the difference between the exercise price and the market price (the price at which the options are granted).