Equity Based Compensation is an highly attractive reward and retention tool which helps employees to become co-owners by value creation of the business. Equity Based Compensations have various structural forms such as ESOPs, RSUs, SARs, Phantoms and ESPS.

ESOP is an abbreviation for Employee Stock Option Plan, as the name suggests its an Option and not an obligation on the employee to purchase shares of the company at a pre-determined price. It makes employee an investor/co-owner in their company to the extent of shares purchased by the employees.

Absolutely not. Equity Based Compensations are many, and it is up to the company to choose the right instruments that are the best in view of its strategic goals, objectives and constraints.

Cash settled plans also known as Phantom are pseudo ESOPs, it entitles the holder to benefit from the increase in the value of the underlying equity price or any other selected parameters over a given time period, here the participant receives the appreciation in value which the company settles in cash. The holder need not be an employee of the company; a vendor or distributor may also be covered under such plans.

This is a myth that Equity Compensation is an incentivization tool only for Listed Companies. In fact, more and more unlisted firms/ closely held companies are looking for Equity Compensation Plans because they can then attract and retain better talent and provide employees a better wealth creation opportunity.

ESOPs in India are governed by few but very critical regulations. The Companies Act 2013 stipulates the specific parameters while offering ESOPs for e.g. who is eligible for ESOPs?; while the accounting and taxation regulations provide detailed guidance on the treatment of ESOPs with respect to grant, vesting, exercising, etc.

A periodic liquidity event is important in an Unlisted ESOPs Plan to keep the employees excited about the Options they have received and provide wealth creation opportunity for them. Regular liquidity events also acquire the conviction of the new joinees’ on ESOP reward programme implemented by the Company. Liquidity Events shows that the Company is genuinely committed by an activity rather than just promising on documents.