Many corporates are moving to a democratic system of working from an autocratic system where a bunch of dignitaries presided over the issues of the company, and anybody else was not given a vote in how the company worked.
The democratic system allows employees to partake in the overall portfolio of the company by letting the employees own shares of the company, therefore, providing recognition and equal participation of the employees in the affairs of the company.
This is referred to as ESOP Shares for employees and is being adopted by many popular business entities and corporate organizations.
ESOP helps in rewarding the employees and acknowledging them for their hard work and participation in the company by providing an opportunity for the employees to own shares of the company and therefore help the company raise funds in a way. This is one of the many options for a company to raise funds when a company has grown to a full-fledged global level.
What is ESOP?
ESOP or Employee Stock Ownership Plan helps corporates and major organizations to raise funds in one of the many forms by selling and dividing the equity amongst their employees in exchange for their service and, of course, money.
Just like IPO (Initial Public Offering), where the shares of a company are allowed to be bought by the general public to raise funds, the Employee stock option plan allows for dividing up the equity by allowing the employees of the organizations to benefit from the overall progress of the company.
It is one of the best ways to ensure that the company is not only recognizing and rewarding its employees for their dedication and presence in the company but also helps the organizations cut down on any Federal income tax they are accountable to pay.
ESOP shares are created and handled by a dedicated organization that helps businesses analyze their overall equity, create shares, calculate ESOP share price and equal distribution of these shares amongst their employees.
These activities are handled by a smaller board or team that helps to maintain these shares and acts as trustee for the Employee stock option scheme developed by a company. There are many benefits of adopting an ESOP system for a business organization.
It is one of the many ways a company can raise funds in advanced stages where they can no longer acquire funds in the conventional ways such as Angel Investments, Venture Capital Investments or via lending boards.
Pros and Cons of Adopting ESOP Method
There are many advantages of adopting an ESOP method for equity management in a large company but some disadvantages. Below are some of the pros and cons of the ESOP method:
1. Pros
- It helps companies divide shares amongst employees rather than the general public.
- It helps build employee morale and branding amongst employees.
- It helps alleviate federal income taxes based on the percentage of ESOP shares offered.
- A trustee can easily manage it for share distribution and resale.
2. Cons
- Shares will not go above Fair market value.
- Sale of share either to company or incoming employee upon employee exit.
- Unequal voting rights amongst shareholders may cause disputes or lessen share value.
- The tax component for shareholders is costly and may also be quite complicated to account for.
