ESOP Frenzy: Are you aware of these key terms related to ESOP?

ESOP is an acronym for Employees Stock Ownership Plan. As the name implies, this is a programme that allows employees to become shareholders in the firm. This option is available once the employee has worked for the firm for a certain number of years. Some companies may additionally request that the employee who has been offered this choice pay a modest fee to convert these ESOPs into equity shares.

Before delving into the specifics of an ESOP, it's important to grasp a few essential terminology. Let's go through some of the key ESOP terminology.

Employee

A permanent employee of a firm who works in India or outside of India is referred to as an employee. This would also include any subsidiary or affiliate company's full-time and independent directors, as well as their workers.

Compensation for employees

This phrase refers to the overall cost to the firm of an employee's compensation, which includes his basic salary, bonus, and any commissions. Employee remuneration does not include the fair value of options issued under an employee stock ownership plan. Employee pay does not include the discounts received when shares are distributed to employees under an ESOP.

Exercise

This phrase refers to an employee's request to the firm to issue shares in exchange for the option he has vested in line with ESOP.

Exercise period

It refers to the amount of time an employee has after becoming vested in an employee stock ownership plan to exercise his options.

Exercise cost

It is the amount that an employee must pay to the firm in order for the corporation to issue him shares under the ESOP.

Grants

This phrase refers to the distribution of options to workers under an employee stock ownership scheme.

Independent director

He is the company's director. He may or may not be a full-time director, and he is not a promoter or a member of the company's promoters group.

Intrinsic worth

This phrase refers to the difference between the market price of a share as part of ESOP and the exercise price of the option, including any upfront payments.

Vesting

The process by which an employee obtains full rights to the options issued to him under an ESOP is known as vesting.

Period of vesting

The time during which the employee's ESOP option matures.

Market price

This refers to the most recent accessible closing price on the stock market where the company's shares are listed prior to the date of the board of directors meeting at which options are granted or shares are issued.

Option grantee

This word denotes that an employee has the right but not the obligation to execute his or her stock option under an employee stock ownership plan.

Cliff period

The time after the grant date when the first options become vested is known as the cliff period. It is necessary in India to have a cliff period of at least 12 months.

ESOPs are frequently used by companies to recruit and retain high-quality employees. Stocks are often distributed in stages by organisations. ESOPs allow employees to purchase business stock at a minimal price and then sell them (after a predetermined period of time established by their employer) for a profit. The ESOP's initials may be easier to grasp if an investor is familiar with the terms described above. Hence, knowing these key phrases is seen as a wonderful beginning step.