Employee stock option, from the point of view of the management and the employees, is like the double edged sword. It hurts if the moves are wrong, but it proves to be the double benefit scheme, when things go well. When you sign a job agreement with a company, if stock option is part of the deal, you are encouraged to give your best output to the company. Increase in share prices is the indicator that the company is doing well and is making profits.



A newly established company wishes to make headway within the shortest possible time, and for that it needs the best talents. Such brilliant individuals are available for a good package. When the company can not afford to pay the salaries and perquisites demanded by them, stock option is the solution with the company. Now the employees have a direct stake in the growth of the company. The stock prices will increase with the increase of the profitability of the company. From the point of view of the employees, this may seem to be a risky proposition, but the chances of resounding rewards are also bright.

This option is a great motivating force. In many companies when promotions are given, offering stocks is part of the deal. The top grade executives will think twice before switching over to another company. The incentive to continue is so strong. Some companies have visualized the potentials of this scheme and they offer stocks to each and every employee, irrespective of the status of the individual, to motivate them to give their best. This is a great tool to win the loyalty and trust of the employees, as they see the identification of their interests with the growth of the company.

Employee stock Options(ESOs) is a contract between the company and its employees, that grants the right to the employees to buy specified number of shares at a fixed price, within a time-frame. The employee is expected to exercise the option within that period; other wise one may lose the opportunity of option.

The practical benefits of this exercise are noticed thus:

The existing employees will think twice before switching over the job. For the new recruits this is an added attraction while considering the package.

The employees and officials feel that they are an indispensable part of the organization. The growth of the organization is linked to the individual growth. They work with more dedication. This is a good formula for the new companies to hold on to as much liquidity as possible.

This tool is extensively used by IT and software companies as reward for the employees and also to retain them in employment for a longer period, if not permanently. This facility has, however been brought under the Fringe Benefit Tax and this tax is liable to be paid by the employer, who in turn recovers the same from the employees. The cost per share thus stands increased proportionately. Some options are tagged on to the vesting period. The employee can exercise this option when this period lapses, which is normally specified in advance. If the employee resigns before the expiry of the period, or his services are terminated, the option lapses.

The problem of valuation of the shares arises, when it is not listed in the Stock Exchange. Normally, a merchant banker is assigned the job. If the share is listed in the Exchange in some other country, that could be a valuable source for the merchant banker to decide the issue of valuation. The employees should familiarize about the tax burden in exercising the option, for one's information and guidance. But this is the legal liability and some one, the employee or the employer has to own it cheerfully.

Employee Stock Option is an excellent management tool to bolster the productivity of the workforce.