Employee Stock Option Program – ESOP is a program from the company to employees by giving employees the right to buy shares of the company. This program allows employees to buy shares at a lower price than the market price.
ESOP is a bonus program to reward achievement, loyalty or certain achievements achieved by employees. With this program, it is expected that employees will be more active and earnest in their work and have high loyalty to the company.
Understanding about ESOP is very important for companies. This is one way to encourage employees to work better, because they feel valued by the company. Meanwhile, for ESOP employees it is an opportunity for them to get benefits other than the salary paid every month.
For this reason, in this article we will discuss in more detail what is ESOP? How ESOPs work, and tips that can be used to manage shares from ESOPs.
What is an Employee Stock Option Program (ESOP)?
The Employee Stock Option Program (ESOP) is a program that allows employees to buy shares of the company where they work at a lower price than the market price. This program is usually offered as part of an employee remuneration package or as a form of incentive to motivate employees and increase commitment to the company.
Under this program, employees will be given an “option” to purchase company shares at a predetermined price (called the “exercise price”) at a predetermined time in the future. If the market price of the company’s stock is higher than the exercise price when the option is exercised, then the employee can sell the shares at a profit.
The employee stock option program can provide benefits for employees and companies. For employees, this program can be an additional source of income and provide an opportunity to invest in the company they work for. For companies, this program can be used as a tool to attract and retain quality employees, as well as increase employee commitment and loyalty to the company.
However, this program also carries some risks, such as the risk that the share price will fall in the future, so that employees may lose money invested in the company’s stock.
How the Employee Stock Option Program (ESOP) Works
In an ESOP, the company will give employees the right or option to buy shares of the company. Usually, not all employees will get this right. Only employees who have important roles and responsibilities for the company, or employees who are considered to have high potential to develop themselves and careers in the company.
However, it all depends on company policy. There are several companies that provide this right to all employees. But there are also companies that only give it to some employees with certain classifications.
The company will determine the purchase price (exercise) that can be obtained by employees and the time to be able to buy these shares. If when the time comes and the specified share price is lower than the market price, the employee can take that right, because the employee can get a lower price than the market price. However, when the time comes and the specified share price is higher than the market price. Then the employee can choose not to use that right.
In addition, if the employee decides to take the rights because the company’s stock price is higher than the stated price in the market, the employee usually will not be able to sell the shares directly because of the “vesting period”. However, not all companies will implement a vesting period, and if the company does not, then the company can sell it directly.
If employees take ESOP rights and receive shares at a lower price and then sell them at a higher price, then the employee can get a cash profit from the difference between the purchase price and the selling price. However, if the employee decides to keep his shares, then he can get benefits in the form of dividends in accordance with the proportion of shares owned.
Tips on Managing Stocks from ESOP
To manage the shares obtained from executing ESOP matters, there are several tips that can be followed, including:
1. Consider the right time to sell shares
When you decide to take the right to buy shares and need to wait for the “vesting period”, there are times when the price of the shares can fall lower than the exercise price. If that happens, then you need to wait for the right time to sell shares. Don’t panic if the stock price is corrected because this is normal. So, you just need to wait for the stock price to rise again and sell it when the price is higher than the exercise price.
2. Avoid overconfidence or underconfidence
Excessive self-confidence and lack of confidence are bad things in investing in financial markets. Don’t be too confident that the stock price will rise so you take the right to buy shares given by the company. You still have to do an analysis of the company’s fundamentals first. If the fundamental conditions are good enough, then you can take it with the assumption that the stock price will rise in the future. But, if the company’s fundamentals show unfavorable conditions, then don’t take those rights.
This job will probably be easier because you work there.
When you choose to take your right to buy shares and it turns out that the share price on the market has been corrected, then don’t be confident that the stock will not go up again. Previously, when you decided to take the purchase rights granted by the company, you did it because the company’s fundamentals were quite good and it had bright prospects in the future. Therefore, there is no need to doubt the results of the analysis that you did before.
3. Consider the factors that can affect stock prices
In addition to paying attention to the company’s fundamental conditions, pay attention to changes that occur in the company’s industry, such as regulatory changes, market growth or decline, or technological changes that can affect the company’s prospects. Because these things can affect the trend of stock prices in the business sector. In addition, pay attention to external factors, such as changes in interest rates, economic growth, or political changes that can also affect the investment sector and capital market.
