What is the ESOP Scheme for Motivating Employees? – Investometry

Reading Time: 3 minutes

Let me start by example. Imagine you are working in a technology company named ‘ABC’ for let’s say 5 years. This company is performing extremely well, earning a lot of revenue and profits and increasing its market share year by year. You are working very hard since you joined the company and at the end of the month you are getting just a fixed salary and on the other hand, the company is increasing it’s profit incredibly. So as an employee you will obviously get a feeling that I’m working so hard and not getting a raise or incentive on my salary. Basically, all this hard work is making the company earn profits and you are not getting any benefits. The company is getting benefited and growing but I’m not able to be the part of the growth. So eventually you will decide to leave the company and join with those who give you rewards based on your performance and contribution.

So the company lost a talented employee just because they were not making you feel valued. A well-established company is not a company standing in that position without its employees. In this kind of case, the company must value their employees and make them feel wanted.

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Considering this, the company should hold onto the employees who work hard and make other employees also work hard. Salary alone is not enough for this to happen. So the company provides salary plus the shares of the company to the employees. This is the Employee stock option Proposal (ESOP) scheme.

I will explain to you this by giving an example. Let’s say you joined a company 2 years ago on 1st Jan 2018. You worked hard and contributed to the company’s growth. So under this scheme, the company provides you a letter of appreciation along with a proposal. The proposal says that if you work with the company for 3 years more then we will give you an option to buy let’s say 1000 shares of our company at Rs. 20 per share. It doesn’t matter if the stock price would be trading at Rs. 400 or Rs. 4000 at that time but we will give you at Rs. 20 for sure. So the company granted you the scheme which is right now a dead paper but it will get alive after 3 years on 1st Jan which will give you the right to buy 1000 shares at the decided price if you work with the same dedication and hard work for the next 3 years.

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This was you feel valued in the company plus you will get to participate in the growth of the company and also get rewarded with the dividends and the capital appreciation of the stock.

I hope you understood the concept by this little example. Thank you for reading and if you like the blog do share it with your friends and family and don’t forget to subscribe!

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Meet Mehta

21 | Small & Mid Cap Investor | CFA L1 candidate | Blogger | Reader | Engineer | Life-Long Learner
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