Equity and share option schemes are popular mechanisms used by companies to incentivize and reward their employees. These schemes offer employees the opportunity to become partial owners of the company they work for and align their interests with those of the shareholders. By granting employees ownership in the form of equity or share options, companies aim to foster loyalty, motivation, and a sense of ownership among their workforce.

In this blog, we will explore five basics of equity and share option schemes you get at and how they function, and the benefits they can provide to employees

1.      Employee Stock Option Plan (ESOP)

An Employee Stock Option Plan (ESOP) is a type of equity and employee share options scheme that allows employees to benefit from the ownership of company shares. ESOPs are commonly used by companies as a way to attract, motivate, and retain talented employees.

Under an ESOP, eligible employees are granted stock options, which give them the right to purchase a certain number of company shares at a predetermined price (known as the exercise price or strike price) within a specified time period.

ESOP at BoardRoom typically include a vesting period, which is the time an employee must wait before being able to exercise their stock options. Vesting periods can range from a few months to several years, and they are often designed to incentivize long-term commitment and performance.

By participating in an ESOP, employees have the opportunity to become partial owners of the company. As shareholders, they may benefit from any future increase in the company’s stock price and potentially earn dividends. ESOPs provide employees with a financial incentive to help drive the company’s success. If the company performs well and the stock price rises, employees can profit from the increase in value.

2.      Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are a type of equity compensation plan that companies can offer to their employees as a way to provide ownership in the company. They are often used as a form of long-term incentive and are granted to employees with a vesting schedule.

When a company grants RSUs to an employee, it is essentially promising to issue shares of company stock to the employee in the future. However, unlike stock options, RSUs do not grant the right to purchase shares at a predetermined price. Instead, RSUs represent a promise to issue shares once certain conditions are met.

RSUs typically have a vesting schedule, which is a predetermined timeline over which the employee gains ownership of the RSUs. For example, a company might grant RSUs with a four-year vesting schedule, where 25% of the RSUs vest each year. Until the RSUs vest, they are considered “restricted” and cannot be sold or transferred.

Once RSUs vest, the company converts them into actual shares of company stock and delivers them to the employee. At this point, the employee becomes a shareholder and can benefit from any appreciation in the stock price.

RSUs have tax implications for employees. Generally, the value of vested RSUs is treated as taxable income at the time of vesting. The company may withhold a portion of the shares to cover the employee’s tax obligations. When the employee sells the shares, any further gains or losses will be subject to capital gains tax.

It’s important to note that the specific details and terms of RSUs can vary between companies, and employees should review their company’s RSU plan and consult with a financial advisor or tax professional for personalized advice.

3.      Stock Purchase Plan (SPP)

A Stock Purchase Plan (SPP) is an equity scheme that allows employees to purchase company stock at a discounted price. It is a type of employee benefit plan that aims to promote employee ownership and provide employees with an opportunity to invest in the company’s shares.

The company determines the eligibility criteria for participating in the SPP. This may include factors such as length of service, job level, or other specific requirements. Eligible employees are given the opportunity to enroll in the SPP during specific enrollment periods. They can choose to contribute a portion of their salary to purchase company stock.

Once enrolled, the employee authorizes the company to deduct a predetermined amount from their salary, usually on a regular basis (e.g., monthly or quarterly). These deductions are accumulated in a designated account.

At the end of each purchase period (which may be determined by the company), the accumulated funds in the employee’s account are used to purchase company stock at a discounted price. The discount is determined by the company and may vary.

It’s important to note that the specifics of an SPP can vary depending on the company and jurisdiction. Employees should consult their company’s HR department or refer to the official plan documentation to understand the details and benefits of their specific SPP.

4.      Phantom Stock Plan

A phantom stock plan is a type of equity-based compensation scheme that allows employees to receive benefits similar to those of traditional stock ownership without actually owning company shares. A phantom stock plan is a contractual agreement between the employer and employee, where the employee is granted a hypothetical or “phantom” stock unit that tracks the value of the company’s actual stock.

Under the plan, employees are allocated a certain number of phantom shares, which represent a notional ownership stake in the company. The value of these phantom shares is typically tied to the market value of the company’s stock or a predetermined formula based on company performance.

Phantom stock units are subject to a vesting period, during which the employee must remain with the company to become eligible for the benefits. Once the vesting conditions are met, the phantom shares are typically converted into cash or company stock, depending on the terms of the plan.

5.      Stock Appreciation Rights (SARs)

SARs provide employees with the right to receive a cash payment equal to the increase in the stock price during a predetermined period.

Unlike stock options, SARs do not grant employees the right to purchase company shares at a specific price. Instead, SARs entitle employees to a cash payment equivalent to the increase in the stock price over a predetermined exercise or vesting period.

In many cases, SARs expire if an employee leaves the company before the vesting period is complete. However, some plans may have provisions for early exercise or allow a limited time for exercise after termination.

It’s worth noting that the specifics of these schemes can vary from company to company. The eligibility criteria, vesting periods, exercise prices, and other details may differ. Employees should carefully review the terms and conditions of each scheme to understand the potential benefits and any associated risks.