Employee Stock Ownership Plan: Is It Worth

Employee Stocks Ownership Plan (ESOP): Is it Really Worth?

One of my friend asked me that, Should I go for ESOP? My Company is offering me this plan for 30% cut in salary. Now, those who don’t know anything about the ESOP, let me tell you that What is ESOP and How it Works?

An employee stock ownership plan (ESOP) is a way in which employees of a company can own a share of the company they work for. There are different ways in which employees can receive stocks and shares of their company. Employees can receive them as a bonus, buy them directly from the company, or receive them through an ESOP.

Companies may establish an ESOP for a number of purposes. Most press attention regarding the use of ESOPs focuses on their use as a takeover defense or as buyouts of failing companies. These account for a very small percentage of ESOPs.

The main purpose of an ESOP is to reward and motivate employees. They are also used to provide a market for departing owners of successful companies. In most cases, an ESOP is given to an employee, rather than purchased by an employee.

Recently, employees are attracted towards ESOP because the Employees of Microsoft, Google, HDFC & Infosys became multi-millionaire by this plan in the past and that’s why people have started thinking that ESOP is the way to get rich quick.

But wait, if you ask me than, I would not suggest you to go for this option. This is because the employees of Satyam & Subhiksha not became rich by this way. And not only this but sometimes, the valuations of the stocks is 50% hyper inflated.

Take for example HDFC bank. There are many people who got it at Rs 10 at the time of the Initial Public Offer (IPO) (even an ESOP could not have been cheaper!). However many people promptly sold it off at Rs 40 on listing. Those who bought it at Rs 40 and are still holding it and have obviously made much more money!

So this example suggest that, ESOP doesn’t make anyone rich. But it is the time and money invested in wise Investments will make anyone rich.

Another argument for investing in ESOP is – Tax Break. As you are not receiving any cash in your hand. So you don’t have to pay any tax on the shares you receive. But still it is advisable to invest in some good equity diversified mutual fund rather than in ESOP.