18 November 2009
Employee Stock Option (ESOP) and Sweat Equity (SE) are new tools, which are in use by a lot of multinational companies and consulting companies coming to India and engaging the real brain of Indian professionals who are offered ESOP/SE by such companies as an incentive to them. In absence of any set law or precedent about its legality, taxation and accounting, a great deal of confusion is prevailing and an attempt is made to resolve the same.
Why ESOP or SE ?
The employee stock option plan is a good management tool for retention of human talent and guarding against poaching of staff of a running organisa-tion by a rival company.
When a company is newly formed or starts a new line of business, the company engages the best executives and employees available, who bring in their IPR (Intellectual Property Rights) and know-how, skill and expertise with them, which make a value addition for the company. Certain key professionals would like to invest in the companys capital and would like to risk their own contribution to the capital of the company along with their own IPR, know-how, skill and expertise. Such employees would like to be a strategic part of the promoter group and would like to make value addition to their capital invested in the company. Such an employee is awarded with Sweat Equity as an incentive to join the company.
As the company grows, the management would like to see that all its core management team remains with them and further, such core management team is given additional incentive as a reward for the efforts put in by them in managing the company. Such employees are offered ESOP at a price which is less than the real value of the share.
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