Employee incentives have evolved beyond traditional remuneration packages, embracing ownership structures that align employees’ interests with company success. Among these structures, Employee Stock Option Plans (ESOP) and Employee Stock Ownership Schemes (ESOS) are frequently employed. These terms, while seemingly interchangeable, have distinct features and implications that warrant closer examination.
ESOS: Employee Stock Ownership Schemes
Eligibility Criteria for ESOS Participation:
Under Section 2(37) of the Companies Act, 2013, an ‘Employee Stock Option’ (ESOP) is defined as an option granted to directors, officers, or employees of a company, its holding company, subsidiary companies, or any affiliated entities. This option offers these individuals the benefit or right to purchase or subscribe for shares of the company at a predetermined price in the future.
As per Section 62(1)(b) of the Companies Act, 2013, the eligibility criteria for ESOS participation are as follows:
- Permanent employees, whether in India or outside, are eligible.
- Directors, regardless of whether they are whole-time directors, except for independent directors, can participate.
- Employees of subsidiaries, both in India and overseas, as well as employees of the company’s holding company, qualify. However, the following categories are ineligible:
- Employees who are promoters or belong to the promoter group.
- Directors who, directly or indirectly, hold more than ten percent of the company’s outstanding equity shares themselves, through their relatives, or via any body corporate. Hence, it’s incorrect to assert that “Every employee of the company is eligible to participate in Employee Stock Option Scheme” (ESOS).
|Definition and Mechanism||An Employee Stock Option Scheme (ESOP) is a plan where a company grants employee stock options directly or through a trust. Employees are given the option to purchase company shares at a later date, following a vesting period.||An Employee Stock Ownership Scheme (ESOS) involves the direct allocation of company shares to employees, transforming them into genuine shareholders. These shares are granted as part of a public issue or through a trust, which may undertake secondary acquisitions.|
|Purchase of Shares||Employees are provided the opportunity to purchase shares at a predetermined price after the vesting period||Employees can acquire shares immediately upon allocation at a discounted price.|
|Lock-in Period||The company can stipulate a lock-in period for shares acquired through the exercise of options.||Shares received under ESOS are subject to a minimum lock-in period of one year from the allotment date.|
|Public Issue Participation||ESOPs necessitate separate approval by the company through a special resolution in general meetings. They cannot be integrated into a public issue.||Shares under ESOS can be issued as part of a public issue.|
|Vesting Period||The minimum vesting period for ESOP is one year.||There are no vesting periods for ESOS, as shares are offered immediately upon allocation.|
Employee Stock Option Plans (ESOP) and Employee Stock Ownership Schemes (ESOS) are instrumental in fostering employee engagement, loyalty, and alignment with company objectives. While both mechanisms aim to bridge the gap between employees and ownership, they diverge in key aspects.
ESOP grants employees the option to purchase shares at a later date, linked to a vesting period and subject to potential capital gains. ESOS, on the other hand, bestows immediate ownership and voting rights upon employees, fostering a direct connection to the company’s fortunes.
Organizations must carefully evaluate their goals and the preferences of their workforce when choosing between ESOP and ESOS. By understanding the differences, companies can implement the most appropriate ownership structure that not only motivates employees but also propels the organization toward sustained success.