The main aim of giving such a plan to its employees is to give shares of the company to its employees at a discounted price to the market price at the time of exercise.
ESOP’s come with a lock-in period known as vesting period and employees can exercise the options only after this period. 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. Many companies like Infosys in their early days used to award employees and even clerical staff with ESOP’s. Infosys grew very fast; many employees who got ESOP’s of Infosys in the early days and preferred to keep these shares have today turned millionaires. Many small companies which are growing fast but are in need of cash have started replicating the ESOP’s model which was implemented by Infosys. At the time of giving ESOP’s:The benefits arising on ESOP’s are taxed as Perquisites in the hands of the employee and form a part of the employee’s salary income. For many startup employees, ESOPs or Employee Stock Options is seen as the pot of gold at the end of a tough journey. Last month, a startup came to us for company incorporation with three promoters in a state of India.
Employee Stock Option Plans or ESOPs are perhaps the most important form of remuneration for employees.
Growing up in a typical Indian household, the kitchen was strictly off bounds for both me and my brother. 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 (especially in the startup phase) have now started giving Employee Stock Options as this is beneficial to both the employer as well as the employee. If the employee leaves the organisation before completing the specified period – these ESOP’s get lapsed and the employee will not get any benefit. In the initial days of ESOP’s in India, small organisations who were cash strapped used to give ESOP’s to their employees to increase the overall pay package. This model not only helps the organisations preserve cash but also keeps the employees motivated. The Capital Gain is computed as the difference between the sale price and the price at which it was awarded by the Employer.
Esops as a concept can seem deceptively simple, but if the startup employee is not careful or does not understand this concept well it can all disappear like Leprechaun gold. They said they want to create an ESOP pool right then in order to offer Employee Stock Options (ESOPs) to their employees without knowing what ESOPs are and how they can be used to promote the startup.
From a startup’s perspective, it helps to maintain liquidity and from an employee’s perspective, it is a reward for loyalty. Until 1981 she used to work as a rag picker on the city streets for a living, earning Rs 5 per day.
In fact, since employees directly benefit from the increase in the share price, they focus on overall value creation for the company.
In this manner, they were able to compensate the employees in kind without affecting their cash reserves (if a organisation issues ESOP’s- its cash reserves are not affected).
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 fact, Narayan Murthy went on record saying that “Every Indian employee at every level who joined the company on or before March 2010 is a stakeholder of Infosys”. Thus, if such ESOP’s are held by the employee for more than 12 months, the gains arising on the sale of such ESOP’s is effectively exempt from Tax.
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