Presentation1 esop

download Presentation1 esop

of 8

Transcript of Presentation1 esop

  • 7/31/2019 Presentation1 esop

    1/8

  • 7/31/2019 Presentation1 esop

    2/8

    It is the option given to the whole- timedirectors, officers or employees which gives

    such directors, officers, employees topurchase or subscribe at a future date , the

    securities offered by the company at apredetermined price

  • 7/31/2019 Presentation1 esop

    3/8

    The idea behind stock options is to align incentives between the employees andshareholders of a company. Shareholders want to see the stock appreciate, sorewarding employees when the stock goes up ensures, in theory, that everyoneis striving for the same goals. Critics point out, however, that there is a bigdifference between an option and the ownership of the underlying stock. If thestock goes down, the holder of an option would lose the opportunity for a bonus, but wouldn't feel the same pain as the owner of the stock. This isespecially true with employee stock options because they are often granted without any cash outlay from the employee.

    Another problem with employee stock options is the debate over how to valuethem and the extent to which they are an expense on the income statement.This is an ongoing issue in the U.S. and most countries in the developed world.

  • 7/31/2019 Presentation1 esop

    4/8

    Encouraging the cooperation &involvement of all employees inimproving the performance of the business.

    Giving employee a sense of identification with the company

    Rewarding employee for past performance

    Generating a sense of business awarenessamong employees

  • 7/31/2019 Presentation1 esop

    5/8

    There is a vesting period during which options cannot be exercised

    When employees leave during the vesting period options are forfeited

    When employees leave after the vesting period in-the-money options areexercised immediately and out of the money options are forfeited

    Employees are not permitted to sell options

    When options are exercised the company issues new shares

    To realize cash from an employee stock option the employeemust exercise the options and sell the underlying shares

  • 7/31/2019 Presentation1 esop

    6/8

    Advantages :

    Increases employee loyalty and commitment to the organization.

    Employees become owners with a financial stake in the company's performance.

    Talented employees will be attracted to the company, and will be inclined to stay inorder to reap the future rewards.

    Stock options also offer tax advantages to businesses.

    Companies are not required to record options pending as an expense.

    "Granting options enables managers to pay employees with an IOU rather than cash- with the prospect ,that the stock market, not the company, will one day pay up.

  • 7/31/2019 Presentation1 esop

    7/8

    Disadvantages:

    The difficulty of accounting, expensing options in particular;

    The opportunity cost of options for the granting firm higher thanthe value of options to undiversified executives;

    Giving executives extra incentives to manipulate accounting information;

    Rewarding executives excessively in the boom market;

    Failure to penalize bad performance by resetting option price in the downmarket

    Encouraging executives to take excessive risks at the cost of theshareholders

  • 7/31/2019 Presentation1 esop

    8/8