This thought constantly runs in the minds of Entrepreneurs that is easy to solve by providing Employers with a new take on ESOPs.
Employee Stock Option Plans is one of the strategies that is attracting, remunerating and retaining employees for any organization. This Strategy is something more than financial strategy that benefits both Employers as well as Employees.
Seeing the benefits from the Employers point of view, it helps them to maintain Liquidity, Motive and thereby improves productivity within the organization along with certain tax benefits in the hands of Employers. In a way, ESOPs are very fruitful for an organization as it renders entrepreneurs the option to hire and retain great talent without having to commit huge salaries that thereby solves liquidity issues of an organization. In a way, it also builds sense of belonging and accountability in the minds of the employees that is v helpful in growth and success of a company.
ESOPs is a type of Employee benefits scheme under which company offers its shares/stock options to Employees at a predetermined rate that is usually at discounted price.
• These options are granted to Employees to encourage them by acquiring ownership in the form of shares that helps in generating sense of belonging in the minds of employees.
• These stock options are also offered to retain high quality employees for the benefit of organization.
• It is tax favored strategy
• No Liquidity burden in the hands of Employers
• It creates a new sense of Transparency and accountability that creates more than just a play where employees are willing to work .
• It helps in growth and success of an organization as well.
Having explained ESOPs in brief, Statistics suggest that ESOPs improves an overall performance of an organization. And Companies that offer ESOPs continue to over perform companies that don’t offer ESOPs.
Firstly, Employees have the benefit of acquiring shares at a nominal rate, and also selling it after a suitable tenure set by the employees and gaining the profit. If, for instance, the share prices of the company boom up, then a good deal of profit is gained by selling the share by employees. To clear it, ESOPs are a part of an employee’s salary, and hence, are taxable income. Hence, Taxed as per the provisions governed under the Income Tax Act, 1961.
Before deciding to grant ESOPs, it is crucial to understand the terms and conditions & Processes pertaining to ESOPs as Rules and laws pertaining ESOPs are quiet Stringent for which you definitely need help of an Expert who can help you understanding the process, laws, rules and policies to be set up for granting ESOPs in your organization and you also need to understand some very important points before issuing ESOPs.
The Important points that company should definitely take care of are for which you may need Expert Advice:
1) Who are eligible Employees to whom options can be granted?
2) Understanding the Process for issuing ESOPs.
3) Understanding compliances that needs to be followed every year by ESOP companies.
4) Understanding Documentation part for issuing ESOPs.
5) Understanding Taxation in the hands of Employer as well as Employee.
6) What happens to ESOPs when employees leave the company?
7) What happens to ESOPs when company is sold?
Owners have many options available with them while selling their company. An ESOP is an effective tool for ownership succession planning while enabling employees at the same time to share in the companys success.
Yes, Definitely Private Limited companies also can offer ESOPs to its employees subject to certain limitation in maximum number of Shareholders.
As per IRS, The maximum age an employer can impose to be eligible for an ESOP is 21. Moreover, he/she should be eligible for ESOP at the time of joining the company. An employer at his own discretion can restrict the eligibility to employees who serve two years of service but only if the plan is been immediately vested.
Definitely as being part of ESOPs Company, it can provide unique rewards and recognition for the work they have rendered in an organization. Also such ESOPs come with retirement benefits as well at no monetary cost to them.
No, considering that the overall saving in liquidity and the boost to the team morale, the cost of ESOP is nothing not just intangibly but also in a tangible manner. Starting @ just ₹ 4,999 (All inclusive) it is less than the interest most companies will save on the saved liquidity.
With an ESOP, Employees are offered the right to buy a specific number of Shares of company stock at a specified price called the Grant price/ Exercise Price/ Strike Price within a specified number of years.
The price of the stock in an ESOP is normally determined on an annual basis by a qualified valuation company.
The Value is based on many factors considering many aspects like current and projected performances of the company, Performance of similar traded companies, The outlook for the industry it operates and geographical area within which the company is operating along with economic outlook overall.
In normal scenario, when a company is sold, the ESOP will usually terminate and the employee- owners of ESOPs receive cash proceeds for the stock they hold. However, in some cases it may even happen that your company may be sold to a company with its own ESOP. Normally, in such a scenario, you are offered ESOPs in the shares of the new company.
Employees will not be able to pledge the ESOP account directly as collateral.