There are different types of ESOPs in India, such as RSU, RSUs, SARs, PEPs, and phantom equity plans. Read on to know the details of each type and how they differ from one another.
Types of Esops :Employee Stock Option Plan or ESOP in India is one of the most common ways to incentivize employees. It is a type of stock option plan in which the company grants an option to purchase its shares to employees. An employee may exercise their option by buying the stocks at a price determined by the terms of the option agreement. ESOPs are generally used to reward valued employees and provide them with an incentive to stay with the company. They can also be used as part of a corporate buyback program or as part of a broader strategy to retain key employees.
In India, ESOPs have become quite popular. However, there are mainly six different types of ESOPs that can be used to incentivize employees in India.
- Employee Stock Option Scheme (ESOS)
- Employee Stock Purchase Plan (ESPP)
- Restricted Stock Units (RSU)
- Restricted Stock Award (RSA)
- Stock Appreciation Rights (SARs)
- Phantom Equity Plan (PEP)
Let’s have a look at each of them to understand how the different types of ESOPs in India work, how they differ from each other, and what benefits they bring to the company and its employees.
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Employee Stock Option Scheme (ESOS):
The ESOS is a type of stock option scheme that grants an employee the right (they are in no way obligated, though) to buy shares of the business directly from the company at a predetermined value. This option is subject to specific performance goals over a certain vesting period.
Employees are allowed to exercise their right to own the offered stocks at a fixed price after the vesting period, which means that there is a chance of acquiring the shares at a much lower value (which is set at the time of issue) than the market price once the vesting period ends. If the employee doesn’t want to exercise their right, they can just let it expire and receive nothing.
Upon exercising, employees enjoy full ownership of their stocks and voting rights in the company and are entitled to receive dividends.
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Employee Stock Purchase Plan (ESPP):
It is an ESOP that gives employees the ability to purchase shares of the company stock at a discounted or lower than the fair market price. The ESPP allows the employees to make periodic investments into the company’s stock, thereby increasing their ownership interest in the business. Each time an employee makes an investment in the stock, they receive a portion of the company’s profits, which is known as a dividend.
This plan offers an employee the same opportunity to acquire shares of the company stock as an individual investor would – without the risk. In this model, employees are able to invest a set amount into the company’s stock either annually or through payroll deductions. The company can offer employees the option to participate in the ESPP every year.
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Restricted Stock Units (RSU):
An RSU is an ESOP that grants employees restricted stock units, meaning employees are allowed to exercise them in order to convert RSU into real stocks when some restrictions, which can be either time-based or performance-based, are lifted, hence the name. Usually, employees are granted RSUs in exchange for a particular amount of time spent working with the company or when certain performance milestones are achieved.
These are specifically designed for executive employees, enabling them to hold a portion of the company’s equity without voting rights or dividends until the shares are actually issued after the vesting period is completed. The number of shares awarded to each executive varies based on their position within the company.
However, since RSUs are not unlocked or cannot be liquidated until the stipulated conditions are met, an employee should not rely on them for financial support in case of an emergency.
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Restricted Stock Award (RSA):
Even though they might sound similar, Restricted Stock Awards are actually very different from Restricted Stock Units. While RSU is a mere promise of giving stocks once a specified time period is over or achieved a performance goal (or both in some cases), RSA actually issues stocks to the employee immediately, allowing them to own the share with all its associated benefits, including voting rights and dividends from the grant date.
But why is this option called “restricted” if it grants full ownership benefits? Because it still comes with a vesting period during which the employee is not allowed to sell the shares in the open market. Employers may set some conditions, which, if not met, or the executive leaves the organisation before the vesting period is over, stocks can be forfeited or repurchased by the company.
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Stock Appreciation Rights (SARs)
If a company wants to give out stock benefits to its employees but does not want the shares to be liquidated, then SARs are the best choice. SARs grant the employee the right to receive an increase in the price of the company’s stock once a specified time period has passed before the expiration date.
Where this plan differs from the regular ESOP is the employee does not pay any exercise price (as no actual shares have been granted); they just receive the value increment of the allotted stocks in the form of cash or shares.
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Phantom Equity Plan (PEP):
PEP and SARs are often used interchangeably; however, there is a subtle difference. Like SARs, Phantom Equity Plan also does not involve any real stock and only pays the increased share value benefit to the employee. But at the same time, PEP mimics a bonus (rather than a stock option) that companies award to employees at a predetermined future date (subject to fulfillment of some conditions) and do not allow employees to exercise at their will within a given time.
Conclusion
We hope that the above-mentioned information on the different types of ESOPs available in India, along with their features helped you get more insights on employee benefits. ESOPs are an excellent way for businesses to attract top talent and keep them motivated and engaged. There is a large pool of employees who wish to own a part of the company they work for. These programs help achieve this goal without forcing employees to take on too much risk.
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