An ESOP (Employee stock ownership plan) is an employee benefit plan which offers employees an ownership interest in the organisation. Which of the following statement is incorrect regarding ESOPs?

Solution

An ESOP (Employee stock ownership plan) is an employee benefit plan which offers employees an ownership interest in the organisation. ESOP is a right to buy shares, not the shares themselves. Process of ESOP includes: • Grant: The company grants an employee the option to buy a specific number of shares at a pre-determined price (the "exercise price"). • Vesting: The employee earns the right to exercise their options over a specified period of time (the "vesting period"), usually tied to continued employment or performance conditions. The employee has no shareholder rights during this period. • Exercise: Once the options are vested, the employee can "exercise" them during a specified "exercise period". This involves paying the pre-determined exercise price to purchase the shares. Upon the successful exercise of the options and allotment of shares, the individual becomes an actual shareholder of the company.  • Sale: The employee can later sell these shares (usually after any applicable lock-in period or during a liquidity event like an IPO for private companies) to realize a financial gain. Intrinsic value of ESOP is calculated as Market price-exercise price