Esops: Boon or bane

It has always been believed that motivated employees of a company.

- AKHIL GUPTA

Employee stock option plans, or Esops, have been long considered globally as an important tool to align the interests of shareholders and employees, thereby motivating employees to work hard for value addition to the company.

Simply put, a stock option is, as the name suggests, an option but not an obligation to an employee to buy shares of his or her company at a predetermined price (exercise price). Thus, if the share price exceeds the exercise price, the employee gains, but if it falls below the exercise price, there will be no loss to the employee since the latter is not "obliged" to buy the stock at that higher price and can simply let the option lapse. It sounds extremely attractive for the employees with gains if the share price goes up but without any risk associated generally while dealing with any share. As a result, for long, Esops have been granted to employees as a long-term incentive plan (LTIP) and hailed as a great tool for "wealth creation" for an employee in tandem with shareholders. In the process, since vesting of such options (i.e. time when such options can be exercised) is over the next few years from grant, Esops have acted as an effective retention tool for good talent.