ESOP’s are Employee Stock Option Plans under which employees receive the right to purchase a certain number of shares in the company at a predetermined price, as a reward for their performance and also as motivation for employees to keep increasing their performance. It is also a kind of employee benefit plan, similar in some ways to a profit-sharing plan.Employees typically have to wait for a certain duration known as vesting period before they can exercise the right to purchase the shares.
Many companies like Infosys in their early days used to award employees and even clerical staff with ESOP’s. This way, there were able to manage their direct costs. Moreover, giving ESOP’s to employees was also a way of motivating the employees to work harder by creating the sense of ownership and directly rewarding employees for increase in the company’s valuation.
In recent news one can see how Cash bonanza is on the way for employees of payments company Citrus Pay, as bigger rival PayU agrees to buy the Mumbai company for about Rs 860 crore, in one of the biggest deals in the Indian financial technology space. About 50 employees are set to share in the spoils with an estimated Rs 43 crore being allocated as returns on the employee stock option plan (ESOP). About 15 employees are set to rake in over Rs 1 crore, with an office boy who was one of the first employees at the company taking home Rs 50 lakh.
When the employees are given shares of the same company in which they are working, it gives them a sense of feeling that now they are not employees of this organisation but are the owners. As they are now they owners, they also have a share in the profits of the company. In fact, since employees directly benefit from the increase in the share price, they focus on overall value creation for the company.