Frequently Asked Questions (FAQs) on Employee Stock Options Scheme

1. What is the ESOS

A compensation package for the key employees of a company should be designed to attract, motivate, and retain the people who can help the business succeed. Deferred compensation can be used as a technique of encouraging the top employees to remain with the company by combining a delayed vesting arrangement with a deferred compensation plan. An organization committed to being a high-performing organization, aims at encouraging every individual to raise his/her level of performance so as to ensure that the individual efforts combine to maximize both corporate performance and shareholder value. Universally, these objectives are aimed to be achieved through the use of a very potent instrument, namely the Equity Stock Option Scheme (ESOS).

Employees' stock options are one of the most exciting and innovative ways, developed in the post-liberalization period, by which a company can design a compensation package that helps it to achieve these goals at the lowest possible cost. Establishing a successful share scheme and tailoring it to a particular company's needs is a challenge. Under a well-designed scheme, there can be major benefits for both the company and its employees.

2. What is the purpose of the ESOS ?
The purpose of Employee Stock Options Scheme (ESOS) is to advance the interests of the company and its shareholders by offering to those employees of the company who will be responsible for the long-term growth of the company’s earnings the opportunity to acquire or increase their equity interests in the company, thereby achieving a greater commonality of interest between shareholders and employees, enhancing the Company’s ability to retain and attract highly qualified employees and providing an additional incentive to such employees to achieve the Company’s long-term business plans and objectives.

3. What are the benefits of ESOS ?
The benefits of ESOS/ESPS to employees are that they are given a chance to become the shareholders of the company at a discounted price to the market price. Thus the employees are given a chance to share the profits of the company by making them shareholders.

4. How will the scheme be exercised ?
The company will constitute a Compensation Committee for administration and superintendence of the ESOS. It will be a Committee of the Board of Directors consisting of a majority of independent directors. The Committee shall formulate the terms and conditions of the ESOS like

  • The quantum of option to be granted per employee and in aggregate.

  • The conditions under which the option vested in employee may lapse

  • In case of termination of employment for misconduct

  • The time period within which the option is to be exercised in case of termination or resignation of an employee

  • The right of an employee to exercise the options

  • The procedure for making a fair and reasonable adjustment to number of options and to the exercise in case of rights issues bonus issues and other actions

  • The grant, vest and exercise of options in case of employees who are on long leave

  • The procedure for cashless exercise of options
No Scheme will be offered unless the shareholders of the company approve it by passing a special resolution in the general meeting.

5. Requirement of Separate resolution ?
It will be required in case of
  • Grant of option to employees of subsidiary or holding company and,
  • Grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option.
6. Can there be any variation in terms of ESOS ?
  • The company shall not vary the terms of ESOS in any manner that may be detrimental to he interests of the employees.
  • The company may by special resolution in a general meeting vary the terms of ESOS offered pursuant to an earlier resolution of a general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the option holders. These shall apply to such variations of terms as they do to the original grant of option.
  • The notice for passing special resolution for variation of terms of ESOS shall disclose full details of the variation, the rationale therefore, and the details of the employees who are beneficiary of such variation.
7. What will be the effect of the scheme on the rights of the employee ?
The employee shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till shares are issued on exercise of option.

8. Other Legal Aspects ?
The Board of Directors shall at each annual general meeting before the shareholders a certificate from the auditors of the company that the scheme has been implemented in accordance with the SEBI guidelines and in accordance with the resolution of the company in the general meeting.

9. Will there be any lock-in-period for the transfer of shares ?
There shall be a minimum period of one year between the grant of options and vesting of option. The company shall have the freedom to specify the lock – in period for the shares issued pursuant to exercise of option.

10. Who is eligible ?
It will be applicable to all class of employees whether working in India or abroad at the discretion of the Compensation Committee. However the following classes of employees are not eligible
  • A employee who is a promoter or belongs to the promoter group
  • A director who either by himself or through his relative or through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company.
11. Employee Stock Options through Trusts ?
Employee Stock Options are also implemented through creation of Trusts. Trusts are formed under the Indian Trust Act and registered under the relevant Trust Act of the state in which the Trust's activities are to be based. The objectives of the Trust are to administer the Scheme for the employees of a certain organization. The Company issues a certain number of shares at par to the Trust. The Trust then issues these shares to the Company employees in accordance with pre-set guidelines. Under such an arrangement, the employees receive shares from the Trust. The Trust can also buy back the shares from employees in circumstances, which may be specified in the Trust Deed. This arrangement imparts liquidity in the scheme and is suited to companies whose shares are not listed.

12. What will be the Tax – Implications of the scheme ?
The employees are liable for Capital Gains tax at the time of sale of the shares. The taxable amount being Full value of Consideration as reduced by the Indexed Cost of Acquisition. The cost of acquisition being the amount paid for purchase of shares.

13. Effect in case of certain situations ?
  1. In case of Death of Employee while in employment - all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.

  2. In case the employee suffers a permanent incapacity while in employment -all the options granted to him as on the date of permanent incapacitation shall vest in him on that day.

  3. In the event of resignation or termination of the employee - all options not vested as on that day shall expire. However, the employee shall, be entitled to retain all the vested options. Option once granted to any employee shall not transferable to any person and also it cannot be pledged, hypothecated, mortgaged or otherwise alienated in any other manner

14. Options outstanding at Public issue ?
  1. The provisions of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines prohibiting initial public offering by companies having outstanding warrants and financial instruments shall not be applicable in case of outstanding option granted to employees in pursuance of ESOS.

  2. If any option is outstanding at the time of an initial public offering by a company, the promoters' contribution shall be calculated with reference to the enlarged capital that would arise on exercise of all vested options.

  3. If any options granted to employees in pursuance of ESOS are outstanding at the time of initial public offering, the offer document of the company shall disclose all the information required in the Director's Report.

15. Accounting Policies ?
  • The options granted to the employee will be treated as employee compensation in the financial statements of the company

  • The accounting value of options shall be equal to the aggregate, over all employee stock options granted during the accounting period, of the fair value of the option.

For this purpose:

  1. Fair value means the option discount, or, if the company so chooses, the value of the option using the Black Scholes formula or other similar valuation method.

  2. Option discount means the excess of the market price of the share at the date of grant of the option under ESOS over the exercise price of the option (including up-front payment, if any)

    • Where the accounting value is accounted for as employee compensation the amount shall be amortised on a straight-line basis over the vesting period.

    • When an unvested option lapses by virtue of the employee not conforming to the vesting conditions after the accounting value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense equal to the amortized portion of the accounting value of the lapsed options and a credit to deferred employee compensation expense equal to the unamortized portion.

    • When a vested option lapses on expiry of the exercise period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense.


    1. Employee Retention Scheme: The idea of this type of scheme is that employees who are consistent performers are retained and available to the Company. The employees who are consistently performing in their relevant fields shall be eligible for incentives under this type of scheme. The incentives shall be over and above their salaries. The incentives can be provided at the end of each year.

      The employees can be rewarded as under: -

      On completion of year-1 an eligible employee shall receive X no of shares
      On completion of year-2 an eligible employee shall receive 2X no of shares
      On completion of year-3 an eligible employee shall receive 3X no of shares, and so on

      The benefit of the above shall be that the longer the employee continues to benefit the Company the more he shall be rewarded

    2. Achievement Incentive Scheme: The objective of this type of scheme is to reward significant achievements and also to encourage the employees of the Company to make achievements with a view to earn rewards and perform better for their own as well as for the Company

    3. Knowledge Retention Scheme: The Idea of this type of scheme is to benefit those employees who have made a significant contribution to product development (e.g. for employees who have contributed to software development in a software company) and have all the knowledge of the same.

      The employees in the above scheme can be rewarded in a manner similar to that of the Employee retention Scheme

    4. Employee Performance Incentive Scheme: The idea of the scheme lies in having a performance index for the employees of the Company and than multiplying the same by Annual appreciation on the Company’s Equity share price during the year.

    5. Defined Contribution Plan: This type of scheme can be an alternative to pension plan. Under This scheme the employer as well as the employee makes a contribution as a percent of annual salary of the Employees to the scheme. The total amount of contribution is invested in the shares of the Company. The value of pension of employee can be determined by ratio of present value of contribution collected for the employee to present value of total contribution.

    6. Profit sharing scheme: Under the scheme the profits of the Company can be shared with the employees in the form of shares where the bonus given to the employees shall take form of shares. The amount of bonus payable shall be fixed as a percentage of Profit after Tax, but the payment for the same shall be made in form of shares of the Company. The amount of Bonus can be utilized to buy shares from the market or otherwise for fresh issue of shares.

    7. Variable Earnings Related to Stock Options: Under this scheme the number of shares offered to each employee will be related to his "annual variable pay earnings", basis of which shall includes parameters likes the performance of the company, performance of the strategic business unit, individual's performance. An employee can receive 50% of his variable pay in cash and rest 50% can be offered in the form of shares at a discount. In case the employee leaves the organization he can encash his variable options.

    8. Economic Value Added (EVA) based scheme: The EVA criteria is also one of the modes of judging the employee performance and the employees can be rewarded in the form of stock options on the basis of value added to the Company.


    The Company’s intention in introducing the Employees Stock Option Scheme is to reward those employees who are and who shall be responsible for the long-term growth and profitability of the Company, thereby enabling them to acquire an equity stake in the Company. The purpose of the scheme is also to enable the employees to acquire shares of the Company at a price lower than the market price of shares and at the same time give the employees an opportunity to participate in the profits of the Company.

    Also as a result of introduction of such a scheme, the Company shall be in a position to retain the employees as well as attract new talent and professionals. The stock options scheme will be an integral part of the Compensation package of the Company. The Company can also introduce a Performance management System that will enable it to monitor and reward the performing employees.

    Levels at which the Employees Stock Option schemes are to be implemented:

    All the employees falling within grade 1 to 4 shall be eligible to participate in the scheme i.e.

    1. Whole-Time directors
    2. Presidents
    3. Sr. Vice-Presidents
    4. Vice-Presidents
    5. Assistant Vice-Presidents
    6. Chief Managers
    7. Sr. Managers
    8. Deputy Managers
    9. Sr. Analysts
    10. Analysts
    All the above-mentioned categories of employees shall be eligible to participate in the proposed Employees Stock option Schemes. The number of options to which an employee shall be entitled shall depend upon various factors and shall also be linked to employees’ performance levels. The Compensation Committee that shall consist of majority of independent directors shall be the deciding authority and shall recommend the employees who shall be eligible for such options. The scheme shall be implemented over a period of 5 years. The Compensation committee shall review the performance of the employees every year and accordingly on that basis the employees shall be rewarded.

    The performance of the Employees shall be considered on the following Basis:

    1. Knowledge
    2. Skills
    3. Initiative taken
    4. Educational background
    5. Teamwork and Cooperation
    6. Hard work
    7. Integrity
    8. Sincerity
    9. Discipline
    10. Vision
    11. Personality
    12. Commitment
    13. Responsibilities undertaken
    14. Confidence Leve
    15. Implementation ability
    16. Length of service
    17. Potential of the employee
    18. Special Achievements
    19. Research Abilities
    20. Networking abilities
    21. Management Abilities
    22. Presentation and Communication Abilities

            An employee may be rated from grade-A to grade-E on each of the above attributes.


            i) Profitability of the Company:

            • Return on Networth
            • Net Profit amount and growth
            • Growth in total revenues
            • Earning per share (EPS)
            • Ratio of profit to total revenues
            • Cost savings

            ii) Profitability of the Strategic Business Units (Departments)

            • Unit wise performance
            • Return on Networth of the unit
            • Net Profit amount and growth of the unit
            • Growth in total revenues of the unit
            • Ratio of profit to total revenues in the unit
            • Cost savings within the unit

            iii) Economic Value Added basis (EVA)

            iv) Market Value added (MVA)

            v) New Business/ clients introduces, New regions introduced


            The above are a few factors that shall be considered by the Compensation committee. The committee shall further exercise its discretion in performance evaluation of the employees. The Committee shall also layout detailed rules for measurement of the above factors for information of all employees.

            Details of the Schemes:

            The Company proposes to introduce the following schemes:

                  1. Employees’ retention Scheme.

                  2. Achievement Incentive Scheme.

                  3. Performance Incentive Scheme.

            The Company proposes to issue 5,00,000 to 7,00,000 equity shares of Rs.10/- over this period of 5 years, which shall be around 5% to 7% of the post public Issue paid-up capital of Rs. 10 crores of the Company.

            The Detailed schemes are as under: -

            1. Employees Retention Scheme: The scheme is introduced in order to benefit the employees of ________________ Limited, who are consistent achievers and which shall enable them to have a long career with the Company. Also the intention in introduction of the scheme is to reward the employees and to retain them and make their services available to the Company on a long-term basis. Under this scheme the Company plans to issue its equity shares to the various grades of employees. The Employees shall be granted options over a period of 5 years. The number of options granted each year would go on increasing. The date of commencement of the scheme shall be relevant date for the employees already within the organisation and the date of joining shall be the relevant date for new Employees.
              The proposed scheme for granting of Stock options to the employees of various grades is as under: -




            YEAR 1 – 2000


            YEAR 2 – 3000


            YEAR 3 – 4000


            YEAR 4 – 5000


            YEAR 5 – 6000

              Thus any employee of grade 1 will be eligible to get a maximum of 20,000 shares of the Company over a period of 5 years.




            YEAR 1 – 1500


            YEAR 2 – 2250


            YEAR 3 – 2500


            YEAR 4 – 3750


            YEAR 5 – 5000

              An employee of grade 2 can get a maximum of 15,000 shares of the Company over a period of 5 years.




            YEAR 1 – 1000


            YEAR 2 – 1500


            YEAR 3 – 2000


            YEAR 4 – 2500


            YEAR 5 – 3000

              An employee of grade 3 can get a maximum of 10,000 shares of the Company over a period of 5 years.




            YEAR 1 – 750


            YEAR 2 – 1000


            YEAR 3 – 1350


            YEAR 4 – 1850


            YEAR 5 – 2550

              All grade 4 employees shall be eligible for a maximum of 7500 shares over a period of 5 years.

              The Stock options granted shall vest in the employee after the decision made by the Compensation Committee, i.e. after the appraisal by the Compensation Committee. The employee shall have a right to exercise the options vested in them after a period of one year from the date of grant of options. Thereafter every year the Committee shall review the performance and the options shall be granted accordingly. The Compensation Committee shall decide in advance the time of employee appraisal.

              The options can be exercised within a period of 2 years from the date of vesting of the options. On expiry of exercise period options not exercised shall lapse. The shares issued to the employee under the above scheme shall have a lock-in period of atleast 1 year from the date of allotment of the shares.

              In case an employee gets promoted to any other level or there is a change in his grade he shall be compensated accordingly. E.g. if a grade 4 employee gets promoted to grade 3 during the third year of the scheme than he shall be entitled to 2000 shares instead of 1350 for which he was entitled to before being promoted to grade 3.

              Also once the scheme has been approved and is under implementation there cannot be variation in terms of the scheme, if it detrimental to the interests of the employees. However the company will have a right to bring about variation in terms of the scheme in interests of the employees.

              In case of death of the employees the options granted to him shall vest in the legal heirs or nominees of the Employee. Similarly in case of permanent disablement of the employee while in employment, all the options granted to him till that date would vest in him.

              The shares, which shall be granted to the employees, shall be chargeable to Capital gains Tax at the time of sale of the shares by the employee. The taxable amount being the full value of consideration as reduced by the indexed cost of acquisition of the shares.

              If the services of any employee are terminated or the employee resigns, the options, which are not granted, shall lapse. However, all the options that are vested in him before the termination or resignation can be exercised.

              The price at which the equity shares will be offered to employees will be decided by the compensation committee from time to time.
            1. Achievement Incentive Scheme: The intention behind such a scheme is to reward the special achievements of the employees. The incentive is introduced to reward the special achievements as well as to encourage employees to make achievements with a view to earning rewards and perform better.

              The Compensation committee shall consider the various achievements of the employees over a period of one year and on the basis of those achievements the employees shall be rewarded. The Compensation Committee can also review the achievements at the end of each month or other such period and if any major achievement is identified the employee shall be eligible to participate under this scheme. The number of options to be granted shall also be determined by the Compensating Committee.

              The Company proposes to set aside 5,000 to 10,000 shares every year for this purpose. Also the Company can issue the number of shares worth Rs. X as a reward under this scheme.

            1. Performance Incentive Scheme: This scheme shall be based upon the performance of the Company’s share price on the stock Exchange. The stock market price and market capitalization of the Company is a real measure of the Company’s performance. This scheme shall enable the Company to reward its employees on the basis of the share price performance.

              Under this scheme the employees of all the 4 grades shall be allotted a fixed number to be called Share Performance Index Number (SPIN). The Spin shall be as under











            The incentive to be granted shall be obtained by multiplying the SPIN with the annual appreciation on company’s equity share price during the year. Annual Accretion can be arrived at after subtracting the Average market price from the base price i.e. the price at which the shares are to be allotted to the employees. Such accretion shall be utilized to issue the Company’s equity shares to the employees at the base price. The number of shares to be issued can be arrived at by dividing the incentive arrived at above by the base price. The number of shares to be issued shall be rounded off to the nearest 100.

              In case of movement of employees from one grade to another he shall be compensated accordingly.


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