There are many ways in which a company provides benefits to its employees. Whether out of moral responsibility, compliance with labor laws, or as a form of reward, a business entity should always take off its employees’ well-being.
Providing health and other benefits, promoting a healthy work-life balance, or simply recognizing a job well done and celebrating small wins, are only a few of the many ways to increase staff motivation in the workplace.
One of the many options is to offer a scheme in which business organizations offer their staff the opportunity to acquire company shares. Such a proposition is called the Employee Share Option Plan (ESOP).
What is a Share Option?
A share option is a chance offered by an employer to a qualified employee to purchase a share in the company at a discount. It’s usually vested over time upon fulfilling specific conditions, for instance, performance target or length of service.
This means that the option holder or employee can exercise the right to acquire company shares in a specific period. In a way, it’s a good investment option for a dedicated employee.
An employee share option plan is simply how companies can offer their staff to buy a specific number of shares at a set price. If an employee accepts an ESOP, the terms will be explained and put into writing, including key information, such as the number of options for the shares offered, the period in which the shares will vest or take effect, and the cost of the shares.
Take note that share options and stock options mean the same. The terms may differ only depending on where you are. In the UK, you most often will hear the term, share options, while US companies may lean towards the use of the term, stock options.
With that out of the way, below are the common terms tied to the employee share option plan and a brief explanation about each terminology:
- Grant Price/Exercise Price/Strike Price – refers to the specified costs at which your ESOP sets the price for stock purchases. It’s typically set according to the share’s current market price.
- Market Price – describes the current stock/share value or price
- Issue Date – refers to the date when the option is given to an employee by the company
- Grant Date – the date when the stock option is awarded to a staff member
- Exercise Date – the date when the employee can exercise or make use of the ESOP
- Vesting Date – the date a worker can exercise his or her employee stock option plan
- Vesting Schedule – dictates when staff may exercise the stock options, or, in the context of ESOP, when an employee becomes eligible to make use of the stock options
- Expiration Date – The date by which an employee must exercise the option to buy the stock/share before the offer lapses or is forfeited.
- Spread or Bargain Element –refers to the difference between the strike price and market price once exercised. A positive spread means that the current market price is higher than your purchase cost and vice versa.
- Exercise – the decision to purchase the stock at the set strike price. An employee has the option not to exercise the stock option if the market value is lower than the strike price.
If an employee accepts the employee share option plan, his or her name will appear in the company’s capitalization table, as may be reflected in the capitalization table culled from CakeEquity.com.
How Does the Employee Share Option Plan Work?
In more concrete terms, an ESOP works in the following way:
On January 1, 2021, your company issues you an employee stock option plan. According to the terms: you have the right to purchase 1,000 shares of the company pegged at USD$5 per share. Your expiration date is slated at January 1, 2031.
Looking at the stock market on March 1, 2026, you noticed that the company’s stock value rose to USD$20. Seeing it as a good opportunity, you decide to exercise your ESOP. This means that:
- Your issue date is January 1, 2021.
- Your exercise date is March 1, 2026.
- Your grant/exercise/strike price is set at USD$5 for each share.
- The current market price is pegged at USD$20 per share.
- Your expiration date is January 1, 2031.
- You need to buy shares for USD$5,000 (USD$5 x 1000 shares).
To exercise your employee share option plan, you may either pay in cash, hire a brokerage firm to sell some of your stocks to cover the purchase price or swap your stocks to interested investors.
The Bottom Line
Offering an employee share option plan is one the best ways to show appreciation and increase
employees’ motivation and overall well-being. Employees, on the other hand, may choose to avail of this scheme to achieve long-term financial goals.