Employee Stock Option Programee

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EMPLOYEE STOCK OPTION PROGRAMME

A stock option is the opportunity, given by the employer, to own a certain number of shares of the company’s common stock at a pre-established price, known as the grant price, over a specific period of time, known as the vesting period.

The objective of ESOP is to reward, retain, attract talent and crate a sense of ownership in the company .ESOP is a dynamic HR tool for retention of talented employees that its usage is no more the prerogative of the IT industry. All the progressive firms and organisations have implemented it or are in the process of doing so. The ESOP operates with a corpus fund of block of shares allotted. Eligible employees are accorded warrants with a lock –in period. Redemption of warrants for stocks, redemption of stocks, which are normally to be procured by the company, and its shareholders are the procedures steps before an employee earns a tag of millionaire. The stocks are priced at a value based on average price, sometimes reduced at a set percentage and allotted. At the moment, ESOP is restricted to top and middle management level executives.

Companies who issue stock option to their employees are in effect, issuing the right to own a portion of the company. Employees who are granted stock option have a vested interest in the performance of their company’s stock. An increase in performance by the employees can be reflected in the profitability of the firm, which in turn benefits the price of stock. The employee exercising their option to subscribe to shares are not required to pay tax at the time of exercise of such option. The benefit acquired at the time of exercise of option is not treated as a perquisite. However, the employee is required to pay capital gains tax at the time of sales of such shares. If he holds it for more than 12 months, long-term capital gain tax will not be levied and the securities transaction tax will be levied on the listed shares. The difference the fair market value of the shares and the amount actually paid by the employee will be treated a  fringe benefit, taxable in the hands of the employer at the rate of 33.99 percent ( corporate tax + surcharge + cess ) under the finance bill 2007. The benefits are limited to talented senior executives who make a difference to the net-worth of the company .These schemes are American models have been copied in India. Pharma companies and IT Industry depend heavily on ESOP to retain talent and to prevent attrition.

Source: HR Concepts

Compiled and Edited by

Mr. S. Murugesan - Lecturer

Dr. P. N. Narayana Raja - Principal

Madurai Institute of Social Sciences

(Run by: DVR Foundation for HRD)

Madurai, Tamil Nadu, India