Employees Stock Option Scheme can be defined as a scheme under which the company grants option to the employees of the company for purchasing the shares of the company at a fixed price. It is the employee discretion whether to exercise his option or not, company cannot force him or her to exercise the option. Let’s look at some of the terms related to ESOP –
1. Vesting Period – It refers to the period for which employee has to be there in a company before exercising his stock option. There is no fix vesting period, each company can have different vesting period.
2. Exercise Period – It refers to the period during which employees can exercise or apply for their stock options provided his or her vesting period is over.
3. Exercise price – It refers to price which is to be paid by employee for buying the option.
4. Market price and discount price – Market price refers to the price of the stock in the stock market if it is a listed company. To make ESOP attractive to its employees companies offer those stock options to employees at discounted price to the market price of the stock.
5. Non transferable – Most of the ESOP are non transferable implying that either employee has to exercise the option or it will expire worthless, but he or she cannot transfer it to other person.
ESOP is an excellent tool for boosting the employee’s efficiency because as company performs well its stock price will move upwards giving direct monetary benefit to the holders of ESOP.