Some corporates prefer to offer ESPS (Employees Stock Purchase Scheme) which provides immediate gratification to employees vis-à-vis ESOP which has longer vesting period. ESOP schemes have an inbuilt uncertainty due to fluctuating stock market prices. The option may turn out to be worthless incase of downtrend in stock markets. T
he opponents of ESOP scheme thus feel that outright allotment of shares (under ESPS) is a superior tool vis-àvis ESOP. The success of any share benefit scheme (ESOP or ESPS) depends
upon management objective, leveraging employee expectation and, above all, stock market dynamics, which are unpredictable
Most of the ESOPs are Call Option granted by a Company to its employees. The employee will not exercise his option so long as exercise price exceeds the market price and hence the option may ultimately lapse or be forfeited. These types of options whose exercise price are higher than market price are also referred as underwater option. During the dot com bubble, stock options issued by some leading blue chip companies were rendered underwater due to adverse market conditions. SEBI guidelines authorise companies to vary the terms and conditions, including re-pricing of options, if they become underwater.
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