Employee Stock Option Plan (ESOP) is a plan through which a company awards Stock Options to the employees based on their performance. An employee stock option is a call option meaning that under an ESOP the employees have the right and not an obligation to buy the shares of the company on a predetermined date at a predetermined price. The objective of ESOP is to motivate the employees to perform better and improve shareholders value. Apart from giving financial gains to the employees, ESOP also creates a sense of belonging and ownership amongst the employees.

ESOP Valuation (both for Accounting of “Compensation Expense” by company and for perquisite Tax payable by the employees) plays a significant role in the success of any ESOP scheme.

The compensation expense reduces the EPS of the company and the possibility of Excess Tax payout by employees may turn the ESOP scheme unattractive. Thus proper planning of ESOP is inevitable.