When you think about what truly motivates employees to stay with a company, salary is only part of the story. More and more businesses are offering stock-based compensation as a way to build loyalty, create wealth, and reward performance. Two popular choices are Employee Stock Option Schemes (ESOS) and Employee Stock Ownership Plans (ESOP).
Both sound similar, but they work very differently. One gives employees the right to purchase shares at a set price in the future, while the other offers direct ownership today. Let’s break this down so you can clearly understand ESOS vs ESOP, how they work, and why companies use them.
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What is ESOS (Employee Stock Option Scheme)?
An Employee Stock Option Scheme (ESOS) is a company-approved programme that gives eligible employees the right to purchase a specific number of company shares at a pre-determined price, known as the exercise price. These options are not granted as shares immediately; instead, they vest over a defined period. Once vested, employees may choose to exercise their options and convert them into actual shares.
ESOS is primarily designed to reward performance, retain key talent, and align employees’ interests with long-term organisational growth. Since the exercise price is often lower than the market value at the time of exercising, employees benefit directly from the company’s success.
What is ESOP (Employee Stock Ownership Plan)?
An Employee Stock Ownership Plan (ESOP) is a structured employee-benefit plan through which employees are given ownership in the company, either as part of their compensation or through a trust mechanism. Unlike ESOS, ESOPs typically grant shares immediately or allocate them over time based on predefined rules, without requiring employees to buy them at an exercise price.
ESOPs aim to build a strong sense of ownership among employees, motivating them to contribute to the company’s long-term performance. Over time, employees accumulate shares, which may be encashed upon resignation, retirement, or during liquidity events as per the company’s policies. This structure makes ESOPs an effective tool for wealth creation and employee retention.
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Key features of ESOS
Here is what makes ESOS unique:
Right to purchase: Employees can buy shares at a fixed price, no matter what the market price is later.
Vesting period: You need to stay with the company for a certain time before you can exercise your options.
No ownership until exercised: You only own the shares once you actually buy them.
Performance-driven: Companies often use ESOS to reward hard work and results.
Key features of ESOP
Here are the key features of ESOP:
Direct ownership: Employees are granted shares without having to purchase them.
Vesting schedule: A set period before employees can fully own their shares.
Long-term incentive: Provides an immediate stake in the company’s success.
Dividend potential: Employees may receive dividends on their shares.
