Question

What are ESOPs? What is their purpose?

Answer 1

ESOPs (Employee Stock Option Plans) are the plans where executive and employees are awarded stocks of the company at relatively lower than market rate or as incentive with restriction of not selling these stocks for a particular time period and other restrictions. With the help of ESOPs, organization tries to make top executive, management and employees to be the shareholders of the organization.

Purpose of the ESOPs is that it prevents agency conflicts in the organization and aligns employees' interests with the interests of the organization. Due to this reason, employees and management work in a way that can maximize the benefits to the organization and organization grows. Since, these people hold stock of the organization, their wealth also grows with the increase in price of the stocks. Hence, it creates win-win scenario for all the parties.