" ESOP - The employer perspective "


  • CA Advocate CS
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ESOP ADVANTAGES ALL ABOUT ESOP ESOP BENIFITS

The employee benefits plan that gives an opportunity to the employees to have ownership interest in the respective organisation is known as Employee Stock Ownership Plan or the ESOP. These Employee Stock Ownership Plan can be issued in three ways, first as a direct stock second as profit sharing plans and third as bonuses. The choice of choosing the form in which the employees wants to avail the benefits of the Employee Stock Ownership Plan is totally dependent up on them.

Although, one should remember that these Employee Stock Ownership Plans are merely an opportunity for the employees and they need to purchase the plans at the mentioned date and before the exercise date. The Company Rules has laid out certain rules and regulations which needs to be followed by the employers when they are granting the Employee Stock Ownership Plan to their respective employees.

How does Employee Stock Ownership Plan work?

The organisations have an option to grant the Employee Stock Ownership Plan to their respective employees. This plan is for them to but a certain sum of shares of the company. These shares are available for the employees at a defined price but only after the option period, i.e. after completion of certain number of years. Therefore, in simple terms, if the employee wants to be a part of the Employee Stock Ownership Plan then he needs to wait till the pre - defined period of years pass by, i.e. that the employee has worked for the organization for those many years before he could exercise his rights over those stocks.

Why Company offers Employee Stock Ownership Plans to their employees?

The Employee Stock Ownership Plan is used by most of the organisations as a tool for not only attracting but also retaining the high - quality employees. The organisations usually choose to distribute these stocks in a phased manner. For example, the organisation may make a policy to grant these stocks to its employees at the very end of the financial year. This strategy helps the organisation in making sure that the employees stay with them at least until the end of the year in order to receive the grant.

Most of the organisations that plan on providing the option of Employee Stock Ownership Plan usually have long term objectives. These long term objectives are not limited to retaining their employees for a longer period of time but also have an intention to make the employees a stakeholder of the organisation. The attrition rate of most of the IT Companies has reached an alarming stage. With the help of Employee Stock Ownership Plans they can try to bring down this rate. Similarly, in the case of startups, they use this plan to attract new talents to be a part of their organisation. Another problem that such organisations face is having a shortage of funds, and thereby are unable to pay good package. Therefore, when they have a stake in their company to offer, even their packages come under the competitive arena.

Employee Stock Ownership Plan from the perspective of an employee

The Employee Stock Ownership Plan comes with lots of benefits for the employees. Firstly,the stacks are available to the employees to but at a nominal rate and secondly, after passage of a specified time frame, the employees have an option to sell those shares and enjoy the profit they made. This is an old scheme and over the years there have been a lot of employees who have earned so much from the Employee Stock Ownership Plan that they enjoy the success as much as the owners do. The best example to give here is when Google went public. Not only the founders of Google became the richest people, but even their employees who had stocks of the company earned in millions.

Tax implications of Employee Stock Ownership Plan

When we talk about taxation, the Employee Stock Ownership Plan acts as a perquisite to taxation. For all the employees who have opted for the Employee Stock Ownership Plan, they can be taxed in two ways.

Firstly, the employees can be taxed when they are exercising their right in the form of a pre - requisite. The amount of difference that is between the Fair Market Value (FMV) and the amount that the employee paid on the date he had exercised his option is the amount which is taxed as the perquisite.

Secondly, the employees can be taxed when they are selling the stock in form of the Capital Gain. The employee always has an option to sell the shares after buying them. If he so decides to sell his shares, and the price that he got paid is more than the Fair Market Value (FMV) on the day he exercised his option then that amount would be taxed as Capital gain.

Depending up on the period of the holding, the capital gains can be taxed. In order to calculate the period, you need to look at the date when the employee exercised his option till the time he decided to sell those stocks. The long - term capital can be termed as all the equity shares which are listed on the recognized stock exchange. The condition that they have to full fill is to hold those shares for more than 1 year. If it so happens that the shares are sold before completing the one - year mark, they will then be considered as short - term capital. As per the earlier scenario, all the long - term capital gains (LTCG)are exempted from tax, the ones that are on the listed equity shares. After the Budget 2018 was passed, an amendment was made to this condition and it changed the condition that if an equity share is sold even after the completion of one - year mark, either on or before April 1, 2018 then he would have to pay tax at the rate of 10% and cess at the rate of 4%. While the tax rate for the Short Term Capital Gain (STCG) is set at 15%.

Benefits of Employee Stock Ownership Plan for the employers

The organisation provides the option of Employee Stock Ownership Plan in order to motivate its employees. As the employees are aware that they could avail the benefits of the scheme when the prices of the stock of the company raises, they be more enthusiastic to put in their 100% of efforts. Apart from motivation the main factor that the Employee Stock Ownership Plan tries to bring in the employees is their retention as well as awarding them for all their hard work. These are only a few of the many advantages that the Employee Stock Ownership Plan has to offer.

The Employee Stock Ownership Plan also helps in saving the immediate cash flow as in the form of rewards the organisation does not need to pay cash compensations. All the organisations that either expanding or are staring their business on a large scale, it is quite convenient for them to offer their employees Employee Stock Ownership Plan in the form of reward when compared to cash compensations.

Problems related to Employee Stock Ownership Plan for the employers

Every coin has two sides and so is the case with the Employee Stock Ownership Plan. For all those companies who are looking for liquidity or succession alternative, Employee Stock Ownership Plan is a good option to choose. But there are certain problems as well that Employee Stock Ownership Plan comes with. The most critical part of the Employee Stock Ownership Plan is follow all the complex rules as well as they need significant oversight. Even though the organisations have an option to outsource the operation to either the ESOP TPA, third party administration or the external advisors in order to manage it, they would still need someone from their internal staff in order to run the program. If it so happens that the organisation does not have competent staff to handle the Employee Stock Ownership Plan, they would have to face various risks as well as be a part of potential violations.

As soon as the Employee Stock Ownership Plan are properly incorporated, the organisation would need to take of the following:

·         Properadministration

·         Third-party administration,

·         Trustee,

·         Valuation,

·         Legal costs, etc.

It is important that the organisation as well as the managers are aware of the ongoing costs. If it so happens that the cash flow which has been dedicated for the Employee Stock Ownership Plan over runs the amount of cash that the organisation would need to reinvest in themselves then, it would not be a wise decision to invest in the Employee Stock Ownership Plan on a long - term basis for the organisation.

Also, all the companies who are in need of additional capital in order to run their business should definitely stay away from the Employee Stock Ownership Plan. As it is clear from the above discussion that in case of Employee Stock Ownership Plan uses the cash flow available in order to purchase the shares from its respective shareholders. So if the case is so that the company is already in need of significant amount of extra working capital or even the capital expenditure, then going for the Employee Stock Ownership Plan would create a situation where they would have to choose between a scheme and all the necessities that they have to pay, thereby creating quite a crisis situation for the management to handle.


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