Who gets to participate in an Employee Stock Option Scheme (ESOS)? That depends on both SEBI rules and your employer's policies.
Regulatory requirements
According to SEBI, eligible employees include:
- Permanent employees of the company, holding company, or subsidiary
- Certain directors (excluding independent ones)
Company-defined criteria
Your employer may also set internal rules based on:
- Your job role or grade
- Performance targets
- Length of service
You may need to complete a certain tenure before getting stock options.
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Eligibility for Employee Stock Option Scheme (ESOS)
The eligibility criteria for an Employee Stock Option Scheme (ESOS) are defined by company policy, organisational hierarchy, and regulatory rules. ESOS is primarily offered to employees to encourage long-term ownership, reward performance, and retain talent. While each organisation sets its own internal guidelines, certain broad eligibility norms are commonly followed across companies. Typical ESOS eligibility requirement:
- Only employees are covered – Directors, permanent employees, and key managerial personnel may be included depending on the policy.
- Full-time employment is preferred – ESOS is usually not offered to freelancers, interns, consultants, or advisors unless specifically approved by the board.
- Completion of minimum service period – Companies may require individuals to complete a probation period or a defined tenure before they qualify to receive stock options.
- Performance-based selection – Many organisations grant ESOS to top performers, critical roles, or employees who demonstrate strong business impact.
- Employee should not be a promoter or belonging to promoter group – As per SEBI guidelines, ESOS cannot be offered to promoters or directors holding more than 10% equity, unless the company is a start-up meeting specified criteria.
- Eligible across different levels – ESOS can be granted to junior, mid-level, or senior staff based on policy, making it a scalable retention tool.
- Cross-border applicability – Multinational corporations can offer ESOS to global employees, subject to local regulations and compliance norms.
Advantages of employee stock options
Employee Stock Options (ESOs) are popular for good reason they can offer both financial and emotional value to employees, especially in growing companies. Here’s why many professionals view them as a strong addition to their compensation package:
- A sense of ownership: ESOs make you more than just an employee they give you a stake in the company’s future. This can boost your sense of involvement and commitment.
- Extra motivation: When the company does well, so do you. This shared success model encourages employees to contribute more actively toward business growth.
- Potential profits: If the stock price increases over time, you can purchase shares at the lower, fixed strike price and sell them at a profit often resulting in a significant financial upside.
- Retention benefits: Most ESOs come with a lock-in or vesting period, meaning the benefits grow the longer you stay. This helps companies retain talent and encourages long-term commitment.
Disadvantages of employee stock options
While ESOs can offer substantial rewards, they also carry certain risks and complexities that employees need to be aware of:
- Market risk: The biggest drawback is that the company’s share price may not increase, and, in some cases, it could fall. This makes the options effectively worthless.
- Tax issues: Exercising stock options may lead to tax liabilities, even if you choose not to sell your shares immediately. This can catch some employees off guard.
- Complex terms: ESOs often come with intricate conditions including vesting schedules, exercise deadlines, and different tax treatments which can be confusing and hard to navigate without proper guidance.
- Limited liquidity: Even after exercising your options, there might be restrictions on selling your shares, leaving your money tied up longer than expected.
While ESOs can be a great wealth-building tool, it’s important to weigh these pros and cons carefully before making any decisions.
Tax implications of ESOs
Tax treatment depends on the type of option and when you decide to buy or sell your shares.
- ISOs: If you hold the shares for long enough, you may pay lower capital gains tax instead of higher income tax.
- NSOs: The gain at the time of exercising is usually taxed as income. Any extra gain (or loss) when you sell is taxed as capital gain or loss.
In both cases, you may need to plan ahead so taxes don’t eat into your profits.
Difference between ESOS, ESOP, and RSUs
Employee equity rewards can be structured in different ways, with ESOS, ESOP, and RSUs being the most common. Though all three aim to offer employees ownership in the company, they differ in how shares are granted, vested, priced, and exercised. Understanding these differences helps employees know the value they can unlock and the obligations they must meet.
1. ESOS (Employee Stock Option Scheme)
Employees are granted the right to purchase company shares at a predetermined price after completing the vesting period.
Key highlights:
- Options are granted at a fixed exercise price decided at grant.
- Employees must exercise the options to convert them into actual shares.
- Ideal for companies wanting performance-linked rewards.
- Beneficial if the market value becomes higher than the exercise price.
2. ESOP (Employee Stock Ownership Plan)
ESOPs are broader employee ownership mechanisms that may include ESOS, purchase plans, or direct allotment. Companies use ESOPs to distribute ownership and retain talent.
Key highlights:
- Can include several types of stock option structures, including ESOS.
- Often includes trust-managed plans where shares are held on behalf of employees.
- Used as a retirement or long-term wealth-building tool in some organisations.
- Helps with company succession and employee engagement.
3. RSUs (Restricted Stock Units)
RSUs provide actual shares (or promise of shares) after vesting, without requiring employees to pay an exercise price.
Key highlights:
- No exercise price; employees receive shares on vesting.
- Often granted to senior executives or high-value talent.
- Value depends directly on the market price on the vesting date.
- Tax implications arise at vesting since RSUs are treated as part of salary income.
Should you accept ESOs as part of your salary?
Accepting Employee Stock Options (ESOs) as part of your salary can be rewarding, but it depends on your financial goals, risk appetite, and belief in your company’s future.
Consider the following before deciding:
- Company growth potential: If your company is on a strong upward trajectory, ESOs could offer significant long-term gains.
- Risk tolerance: ESOs are tied to market performance and come with no guaranteed returns. Assess whether you're comfortable with this uncertainty.
- Short-term financial needs: If you rely on steady income or have immediate financial obligations, ESOs may not offer the liquidity you need.
While ESOs can become a valuable financial asset, they work best when balanced with more stable income sources. Ensure they align with your overall financial strategy.
Final thoughts
Employee Stock Options (ESOs) can be a powerful tool for long-term wealth, but they come with conditions. Before saying yes to an Employee Stock Option Scheme (ESOS), understand how it works, what it offers, and what it demands. Talk to your HR or finance advisor and think long-term. With the right understanding and good planning ESOs can help you build a strong financial future.
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