What is an ESOP?
An Employee Stock Option Plan (ESOP) is an employee benefit plan, which makes the employees stock owners
in that company. Several features make ESOPs comparatively unique. Most companies worldwide are utilizing
this scheme to reward and retain their employees. Currently, this form of compensation most prevalent in IT
companies and other knowledge-based companies where manpower is the principal asset.

How do ESOPs work?
Abroad, ESOP is seen when employees buy over the stock of an owner relinquishing charge. In India, ESOP is
used largely to motivate the employees to put in their best and in turn help the company retain its talent pool.

What else can ESOP be used for?
Interestingly, internationally many companies use ESOPs as a technique of corporate finance for a variety of
purposes -- to finance expansion, make an acquisition, take a company private, and so on. This has yet to
catch on in India perhaps because the scale of ESOP so far is too small for many of these uses.

How does one allocate an ESOP?
Different formulae may be used for allocation. The most common is allocation as per compensation, but
formulae allocating stock in terms of years of service, combination of compensation and years of service have
all been used. Typically employees might join the plan and begin receiving allocations after completing one
year of service with the company.

Let's take Zee Telefilms (ZTL), which considered criteria like length of service, performance and the seniority.
ZTL issued 4.60 lakh ESOPs convertible into equity shares of Rs 10 each, to about 70 employees of ZTL and its
associate companies. Each employee was eligible to apply for between 3,000 shares and 10,000 shares at Rs
212 per share when the share traded at the time was at Rs 4,255 on the BSE. The shares consisted of three
equal parts, issuable to employees with a minimum of two years’ continuous service. One-third of the shares
allotted were freely transferable, another third were locked in for one year from the date of allotment and the
balance was locked in for two years after allotment. Many companies are now flashing ESOPs to attract the
best of talents from big B-school campuses offering ESOPs to graduates at the entry level. This includes
companies like Infosys, Wipro, Microsoft, HCL Technologies and HCL Infosystems.

What is the holding period for an employee under an ESOP?
The maturity for the ESOPs is typically 3-5 years. But some schemes have provisions for a certain percentage
of the stocks maturing from the first year on to allow an employee the facility to offload in case they wish to
move to another company. Of course, a major chunk of the stocks would mature in the final lap.

What is the future of ESOPs in India?
As more and more companies realize the need to retain their best talent in a world which is dominated by
companies with the best intellectual capital, this management technique would be the phenomenon of the new
century.