What are ESOPs?

An Employee Stock Option Plan (ESOP) is a plan wherein a company offers its shares to its employees.

It allows you to buy the share at a certain price. It could be at a market price (the price at which it is sold in the stock market) or at a preferential price as decided by the company.

Why do Companies offer ESOP?

When you buy and hold the shares of a company, you become shareholders and part owners of the company.

Companies offer ESOPs to employees because having a stake in the company along with wealth generation would also increase motivation to work and loyalty to the company simultaneously.

Basically it is a retention tool by the company.

When is it offered?

It is usually dependent on your company policy and your designation. So in some companies you may be offered this option at a managerial level and some give it at a junior executive level to motivate you further.

There are time limits for acquiring it as well. For example, some companies give it after you complete atleast a minimum period of employment. It could be a year or more.

This is called as the vesting period. And if you happen to quit before this period completes then your stocks lapse.

Now this is a critical factor to consider if you are planning to marry or having a baby. Be clear about your plans. If due to circumstances in future you happen to quit your job mid-way of the vesting period, then the entire ESOP contract comes to naught. That is, the stocks lapse.

Stocks are also given in instalments. For example if your company offers you 1000 shares, it might not give you all at one go. Instead you will receive 200 shares after the completion of each year for a span of five years.

In such a scenario if you were to leave the job after say two years, you will receive the profits for those two years and the stock options for the next three years will lapse.

What is in it for you?

Apart from the fact that it is a retention tool, it is a rewarding tool too.

An ESOP is over and above what you get as your salary. For example, say you earn Rs.20,000 per month. Your company offers you 1000 shares currently priced at Rs.100 each which makes your total worth Rs.1,20,000.

However, remember the 1 lakh comes with a catch. You can't sell or transfer those shares until the vesting period which may range from one to five years.

So say after five years you sell your shares, if your company's value shows an upward trend then you make a profit. In other words it is wealth generation for your future. Plus owning the shares or your company also makes you part owner.

The growth of the company and your growth is inadvertently linked. That is if you work hard, the company grows, which increases its market value, whereby your share returns increase as well.