Employee Stock Option

NAME: JEEVAN GEORGE (H00118288)
COURSE: C31CG CORPORATE GOVERNANCE: Theory and Research
TOPIC: “Employee Stock Option”

Employee Stock Option
Introduction
Employee Stock Options (ESO) are one of the common ways of Incentives provided to the specified employees of a company. It carries the right to buy a certain number of shares in the company at a predetermined purchase price. ESO’s are generally not traded on an exchange.
Definition of Employee Stock Option
“An employee stock option is a call option on the common stock of a company, issued as a form of non-cash compensation. Restrictions on the option (such as vesting and limited transferability) attempt to align the holder's interest with those of the business shareholders. If the company's stock rises, holders of options generally experience a direct financial benefit. This gives employees an incentive to behave in ways that will boost the company's stock price.”
For example: An employee of a company gets a stock option on 1000 shares at the rate of DH 100 and the market value of the stock goes up to DH 150, the employee can exercise the option and buy those 1000 shares at DH 100 each, and sell them on the market for DH 150 each, and gain the profit made from the difference. But in case if the stock price does not rise above the option price, the employee will not exercise the option and there is neither gain nor loss.
How stock options are set up
There are two ways in which a company can set up an ESOP. 1. Create a Trust: In this case, the Company will issue shares or options to a trust depending on the number of options to be given to the employees. For this purpose the company needs funds, which can be acquired either by getting loans from the company or by raising loans from other sources for its financial requirements. The loans will be repaid when the employees purchase the options offered and