Esop

Meaning & Origin

Meaning:

  • A unique method that provides a Company’s workforce with an ownership interest in the company.
  • The option granted confers a right but not an obligation on the employee to apply for equity shares of the Company.
  • Stock options are subject to vesting upon which employees can exercise the options to subscribe to the Company’s shares, by paying the predetermined exercise price.

Origin:

  • Year 1956: Mr. Louis Orth Kelso, a pioneer of the ESOP’s created the first ESOP Plan for a closely-held newspaper chain where the retiring owners sold their shares to the employee.
  • Year 1979: The U.S. Supreme Court attempted to clarify what constitutes a stock sale within private pension plans, including ESOPs, in the case of “International Brotherhood of Teamsters v. Daniel.”
  • Year 1980: The United States Securities and Exchange Commission (SEC) sought to further explain the status of employee stock plans. According to the SEC, Employee Stock Ownership Plans were considered securities. However, such stocks did not require registration with the SEC because employees did not purchase ESOP stocks, but were given them by their companies.
  • By year 2010: 13 million employees in U.S.A participated in ESOPs through 11,000 companies.

Trend in India:

  • In India ESOP is not used as a Buyout plan but it’s an incentive plan for the employees which helps to increase the retention rate and to reduce the attrition rate.
  • Indian Companies engaged in IT, Manufacturing and service sectors started implementing ESOPs in the era of 90’s.
  • Since then, ESOPs have gained importance not only in above mentioned sectors but in varied other fields also.
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