What are the different types of ESOPs in India?

An ESOP is a type of employee stock ownership plan that allows employees to get ownership in their company without having to spend their own money. If the firm does well, the employee may be able to sell the shares and profit. The account is funded in a variety of ways by different ESOPs.

It allows workers to buy a specific number of shares in the firm at a predetermined price after an option period, which is generally a set number of years. An employee goes through a predetermined vesting period before exercising their option.

This means that the individual must continue to work for that company until a portion or all of the stock option is exercised. The types of Employee Stock Ownership Plans that are commonly given to workers are as follows.

Employee Stock Purchase Plan (ESPP)

At grant/exercise, an employee may acquire shares at a discount to the market price, which is usually set at a reduced price. A plan term determines the price and date at which an employee can acquire company stock. This is called an Employee Stock Purchase Plan.

Employee Stock Option Scheme (ESOS)

Employees who participate in the Employee Stock Option Scheme are not obligated to exercise their stock options, but they can at a predetermined price. Before vesting, the employee must meet a goal or serve for a certain period of time. The employee can then exercise his or her option to acquire the shares at the predetermined price.

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

Restricted Stock Award (RSA)

If an employee satisfies the employer's pre-set requirements, the employee is offered shares in the firm along with certain voting rights and is entitled to dividend. If the employee does not fulfil them, they will no longer be entitled to receive the company's stock. The employer's requirements may relate to spending a certain time period or to a specific goal.

The Restricted Stock Award can be purchased at a lower price than market value. In most cases, there are no fees associated with stocks. Employees who participate in such ESOPs own the shares from the start and are entitled for bonuses and dividends during the vesting period.

Phantom Equity Plan (PEP)

Employees are offered shares in the firm in theory through a Phantom Equity Plan (PEP) or a Stock Appreciation Right (SAR). After they meet the vesting criteria, they may get a cash value equivalent to the price appreciation above the grant price.

Restricted Stock Unit (RSU)

The Restricted Stock Unit and the Restricted Stock Award are quite similar. The key distinction is that the employee does not have any voting rights or right to dividends. Once the predetermined requirements are satisfied, the employee can exercise the shares issued by the company.

Restricted Stock Units are not immediately transferred to the employee. However, in the future or under certain conditions, the employee may be entitled to partial dividends.

Companies can finance ESOPs by placing freshly issued shares into them, putting cash into them to acquire existing business shares, or borrowing money to buy company shares via the organisation.

The above-mentioned plans motivate members to do what's best for the shareholders.