What is an ESOP? Do you consider ESOP when you negotiate the terms and conditions of your employment?
ESOP stands for Employee Stock Ownership Plan.
Some companies open the Employee Stock Ownership Plan (ESOP) to all employees, and encourage the employees to buy and hold the stocks of the companies. This occurs mainly in United States.
Some companies offer Employee Stock Ownership Plan (ESOP) to senior management only. This happens in many listed companies in other countries.
It is almost a given that the senior management team, such as the CEO, the CFO and others are given stocks in lieu of more salary orbonus.
It is quite rare for a company to extend the Employee Stock Ownership Plan (ESOP) scheme to the cleaners, the tea lady, and part timers.
The administration of the Employee Stock Ownership Plan (ESOP) is very time consuming and tedious.
How does Employee Stock Ownership Plan (ESOP) works?
On the company side, the company has to buy the stocks from the open market. The Board of Directors has to agree on the mandate of share buyback.
That means the company has to use cash to buy the stocks. It has to make announcement to the public when it launches a share buyback from the open market.
The stocks are held as Treasury Stock, and the company cannot sell back to the public.
This prevents the company from buying and selling to manipulate the pricing of the market.
The company usually set up a trust and an Employee Stock Ownership Plan (ESOP) policy to determine the share allocation among the employees. The
It is obvious that the senior management team gets more shares.
Most employees need to contribute cash into the account, and the company matches in term of stock allocation.
Some companies have the stock option scheme in place. This is slightly different from Employee Stock Ownership Plan (ESOP).
That means the company grant the rights to the employees to buy shares at a fixed rate.
For example, the fixed rate is $40 per share. If the employees exercise the right and buy the share at a time when the share price in open market is $120 per share, the employee gains.
He can sell the shares immediately or within an agreed time frame.
Scheng1 is a passionate blogger from Singapore. Rich in every sense reveals my deep desire in enjoying life, and be rich in every possible ways. Personal Finance is about money, from making money to investing money. Retirement in Asia contains resources on retirement planning.