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Stock Incentive & ESOP

Frequently Asked Questions

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What are stock incentive plans?

Stock incentive plans are benefit schemes given by employers to their employees or contractors. The employer grants the employee/contractor right to the company stock under such schemes, both as a reward to the employee/contractor; and to motivate them to perform better.

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What are various stock incentive plans which may be granted by an employer?

There are several equity-linked incentive plans which may be implemented by an employer. Some of the popular schemes are Employee Stock Option Plans (ESOPs); Advisory Stock Option Plans (ASOPs); Stock Appreciation Rights (SARs) and Phantom Stock Options. An employer may offer either of the above, or even a combination of schemes as per the company structure.

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What are ESOPs?

Employee Stock Option Plans (ESOPs) are a benefit scheme where employees in a company are given the option to buy shares of the company at a future date, upon completion of certain milestones. The employee may choose to exercise this right by purchasing the shares at a specified price determined at the time of grant of ESOPs.

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What are the benefits of granting ESOPs?

ESOPs bring in a sense of association and ownership to the employees. They help in retaining talented employees and ensure that employees are focused and motivated to achieve maximum success for the company. ESOPs also aid in taking care of the fund requirement in a startup company, and reduce cash flow strain on the organization.

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How are ESOPs different from other stock incentive plans such as ASOPs?

ESOPs are governed by law, specifically the Companies Act, 2013 and the related rules. Hence, all aspects related to grant of ESOPs are very specific and restrictive, unlike the other schemes which are usually governed by the agreement executed between the parties.

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Is granting ESOPs mandatory?

Granting ESOPs is not mandatory, but it is definitely advantageous to grant ESOPs to employees since it helps retain talent and motivate employees.

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