An Employee Stock Option Plan (ESOP) is a form of Employee Share Ownership. An Employee Stock Option Plan gives employees the right to purchase shares of the company at a predetermined price within a particular time frame.
There are a variety of reasons for implementing an ESOP in a company.
- An ESOP may be used to attract and retain talent.
Companies may set up an ESOP to attract talent. A particular candidate may receive similar offers from a few companies all looking to hire him or her. The availability of an ESOP may sway the candidate’s decision in favour of that particular company.
- An ESOP may be used to promote a sense of ownership.
In some cases, an employee may feel that he or she is working for someone else. If an effective ESOP is in place, this may help the employee to feel that he or she owns part of the company and thus may be motivated to work harder.
- An ESOP may promote long term commitment.
Employees stand to benefit directly from the increase in the value of the company and providing them stock options will encourage them to commit to the company in the long run to reap the benefits of their efforts.
- An alternative method of compensation.
A new startup may not be able to pay full market salary and thus offering stock options are a way to make up for the difference between the employees’ full market salary and their received salary.
There may be some disadvantages of implementing an ESOP, namely as the number of stock options given is dependent on how long an employee has been with the company, the employees who have been longer with the company will have more stock options than those who join the company later. This may mean that the more senior employees will have more company shares and thus would be able to participate more in the decision making of the company.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
The editorial team at ACRA Filing Agent
For more useful articles and videos, visit the ACRA Filing Agent Useful Articles page.
If you would like to submit a question or would like us to do an article on certain topics, please email us at [email protected]