ESOP - Meaning, Full Form, Plan, Scheme, Example, Benefits, & How it Works

5 min read | Updated on September 02, 2025, 14:39 IST

About Upstox

Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.

Despite the advancements in digital and latest technologies, the role of human beings in an organisation remains irreplaceable. A person often gives years and decades of their life to a company, watching it grow and flourish. Of course, the company takes good care of its employees by offering remuneration such as salaries and bonuses. However, for an organisation looking to achieve employee engagement and loyalty, something extra needs to be done.

The companies that truly want to achieve the dual targets of employee engagement and loyalty typically offer an ESOP (Employee Stock Option Plan). By doing so, a company grants its employees the right to own shares in the business. They serve as both an incentive and a reward, aligning employees' interests with the company's performance. This is often provided to key employees and managerial personnel within an enterprise, or to recruits, with the aim of attracting and retaining talent by offering a sense of ownership and potential wealth creation. These shares often come up with different terms and conditions, such as a lock-in period and other restrictions.

Let us walk you through everything you need to know about ESOPs.

What is the Meaning of ESOP? Is it mandatory?

Let us answer the second query first. No, a company doesn't need to offer ESOP to its key employees. It stands for Employee Stock Ownership Plan, a scheme where a company offers its employees the right to purchase its shares at a predetermined price, often lower than market value. This gives employees partial ownership and a stake in the company’s growth and success.

The core idea is to reward employees for their work, diligence, dedication, and loyalty towards the company. It is a motivational tool that ensures that the employees are invested and are aligned with the long-term goals of the organisation.

What are the Key Components of ESOP?

ESOP is a quite well-structured process implemented in phases. Here, we have underlined the key components of ESOP:
Grant: The company offers a certain number of shares to employees as part of their compensation package.
Vesting Period: Employees must stay with the company for a specific period (commonly 3–5 years) before gaining full ownership of the granted shares. Vesting may occur in stages (graded vesting) or all at once (cliff vesting).
Exercise Price: Once vested, employees can buy the shares at a pre-decided price, which is often lower than the market value.
Lock-in Period: As mentioned earlier, in some cases, employees are required to hold the shares for a minimum period before selling.

What is the Difference Between an ESOP Plan and an ESOP Scheme?

Both terms are often used interchangeably. Both refer to the formal document or policy that outlines the structure and grant of ESOPs. Essentially, they outline the rules, eligibility criteria, vesting schedule, exercise price, and other terms of the stock ownership offered to employees. ESOP could be called as a plan or a scheme, but the fundamental purpose remains the same, i.e. to reward employees for their dedication and represent a company’s commitment towards the workforce.

What are the Benefits of ESOP?

From an employee perspective, ESOPs are beneficial. However, it also offers a wide range of advantages to the offering company. Here is a table discussing both:

Benefits of ESOPs (Employee Stock Ownership Plans)

For Employees	For Company
Wealth Creation: Employees can earn substantial profits if the company’s stock value appreciates.	Employee Retention: Vesting schedules encourage employees to stay longer with the company.
Ownership & Motivation: Having equity stakes fosters loyalty and improves productivity.	Attracting Talent: ESOPs appeal to skilled professionals, especially in competitive industries.

Summing Up

ESOPs offer great benefits, but employees should understand the vesting schedule, tax implications, and potential liquidity risks, especially in unlisted companies. Reviewing terms carefully helps avoid surprises. Overall, ESOPs are a win-win, as they give employees a stake in the company’s success while assisting businesses to attract, retain, and motivate top talent. By aligning interests and fostering ownership, ESOPs reward commitment and contribute to long-term growth, making them a valuable component of modern employee compensation strategies.

FAQs

What is the full form of ESOP?

ESOP stands for Employee Stock Ownership Plan, a program offering employees company shares.

How does an ESOP benefit employees?

It allows employees to create wealth, gain ownership, and stay motivated by sharing in the company’s growth.

Are ESOPs taxable in India?

Yes, ESOPs are taxed at exercise as perquisites and on sale as capital gains.

What is the vesting period in ESOPs?

The vesting period is the minimum time employees must stay with the company to claim ownership of granted shares.

Can ESOPs be offered in startups?

Yes, ESOPs are widely used in startups to attract and retain talented employees while conserving cash.

About Author

Upstox Desk

Team of expert writers dedicated to providing insightful and comprehensive coverage on stock markets, economic trends, commodities, business developments, and personal finance. With a passion for delivering valuable information, the team strives to keep readers informed about the latest trends and developments in the financial world.