An Employee Stock Option Plan (ESOP) is a scheme a company offers to employees in the form of its shares and is a part of the overall compensation package. ESOPs are generally handed out to increase loyalty towards the organisation and is a great way to make employees part of the company's growth. Since the company makes employees part-owners (in a small way), ideally, over time, it should also reflect on the company's share price down the line in a positive manner. Employees generally exercise this option only in a case when there is some intrinsic value, i.e the market price is more than the exercise price. A company, on the other hand, gets a lesser price for new shares compared to the prevaling market price. The other drawback is the equity dilution which in turn dilutes the EPS.
An analysis of ESOP for Nifty companies for the previous five years revealed the following:
* In value terms, ITC was the frontrunner by issuing shares of Rs 3,872 crore under ESOPs and the same is reflected in its share price which rose a whopping 2.25 times in last 5 years. In HDFC's case, ESOP was a mind-boggling 97 per cent of its employee cost. However, the stock moved only 70 per cent in the same period. The ICICI Bank, though, witnessed a fall of 5 per cent in its share price
* 24 companies did not see any ESOPs getting vested, including all four Tata companies. No other PSU except SBI saw ESOPs getting vested. Only 3 companies engaged in buy back of shares: HUL, Reliance Industries and DLF. Buy back is considered important as it reduces the effect of EPS dilution