How ESOPs Work And Benefit Employees

Today, employee stock ownership plans (ESOPs) have become ubiquitous, and every employee wants to know its features and benefits. In this piece, we take a look at ESOPs, how they work, and what benefits they hold for employees working in big firms or companies.

Milan Ganatra, founder and CEO, 1SilverBullet, said, “ESOPs are a type of employee benefit plan that permits employees to own a portion of the firm. In such a process, employers typically allocate a certain percentage of a firm’s stock shares to a qualifying employee with no upfront cost involved through an ESOP. After that, these ESOPs’ shares are held in a trust structure to keep them safe and grow until an employee retires or chooses to leave the firm. After which the employer buys back employees’ shares and returns them to the firm.”

When an employer offers ESOPs, they remain in a trust fund for a particular period. This period is called the vesting period. And once the vesting period is over, employees then have the right to exercise their ESOPs. Employers get to decide the number of shares that can be offered, and they determine their price and the beneficiary employees. Once this is done, the selected employees are entitled to exercise their ESOPs and buy the firm’s shares at allotted prices, which are lower than the market value.

Adding to it, Ganatra said that employees could also sell ESOP shares that they have bought and make a profit. Suppose an employee leaves the organisation or happens to retire before the designated vesting period. In that case, a company is required to buy back the ESOP within 60 days at a fair market value. “ESOPs should be looked at from a long-term perspective; if utilised correctly, they can become a vital tool for wealth creation,” Ganatra said.

What benefits do ESOPs hold for employees?

Provides a sense of ownership: When an employee gets ESOPs, it helps them keep motivated as they get a stake in their firm’s growth and profit. They feel like they are more than just workers filling a position. It also provides employees with a sense of belonging because it gives them a real stake in their firm’s growth trajectory.

Wealth Creation: ESOPs helps create true personal financial wealth for employees. Ganatra said, “While monthly income and other savings plans can help employees to meet their daily expenses, ESOPs give them an option to create a handsome corpus. In many ways, ESOPs are the stepping stone to creating long-lasting, generational wealth.”

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