Types of Esops :Employee Stock Option Plan or 

ESOP in India is one of the most common ways to

incentivize employees. It is a type of stock option plan in which the company grants an option to

purchase its shares to employees. An employee may exercise their option by buying the stocks at a

price determined by the terms of the option agreement. ESOPs are generally used to reward valued

employees and provide them with an incentive to stay with the company. They can also be used as

part of a corporate buyback program or as part of a broader strategy to retain key employees.

In India, ESOPs have become quite popular. However, there are mainly six different types of

ESOPs that can be used to incentivize employees in India.

 Employee Stock Option Scheme (ESOS)

 Employee Stock Purchase Plan (ESPP)
 Restricted Stock Units (RSU)
 Restricted Stock Award (RSA)
 Stock Appreciation Rights (SARs)
 Phantom Equity Plan (PEP)

Let’s have a look at each of them to understand how the different types of ESOPs in India work, how

they differ from each other, and what benefits they bring to the company and its employees.

1. Employee Stock Option Scheme (ESOS):

The ESOS is a type of stock option scheme that grants an employee the right (they are in no way

obligated, though) to buy shares of the business directly from the company at a predetermined

value. This option is subject to specific performance goals over a certain vesting period.

Employees are allowed to exercise their right to own the offered stocks at a fixed price after the

vesting period, which means that there is a chance of acquiring the shares at a much lower value

(which is set at the time of issue) than the market price once the vesting period ends. If the

employee doesn’t want to exercise their right, they can just let it expire and receive nothing.
Upon exercising, employees enjoy full ownership of their stocks and voting rights in the company

and are entitled to receive dividends.

2. Employee Stock Purchase Plan (ESPP):

It is an ESOP that gives employees the ability to purchase shares of the company stock at a

discounted or lower than the fair market price. The ESPP allows the employees to make periodic

investments into the company’s stock, thereby increasing their ownership interest in the business.

Each time an employee makes an investment in the stock, they receive a portion of the company’s

profits, which is known as a dividend.

This plan offers an employee the same opportunity to acquire shares of the company stock as an

individual investor would – without the risk. In this model, employees are able to invest a set

amount into the company’s stock either annually or through payroll deductions. The company can

offer employees the option to participate in the ESPP every year.

3. Restricted Stock Units (RSU):

An RSU is an ESOP that grants employees restricted stock units, meaning employees are allowed to

exercise them in order to convert RSU into real stocks when some restrictions, which can be either

time-based or performance-based, are lifted, hence the name. Usually, employees are granted RSUs

in exchange for a particular amount of time spent working with the company or when certain

performance milestones are achieved.

These are specifically designed for executive employees, enabling them to hold a portion of the

company’s equity without voting rights or dividends until the shares are actually issued after the

vesting period is completed. The number of shares awarded to each executive varies based on their

position within the company.

However, since RSUs are not unlocked or cannot be liquidated until the stipulated conditions are

met, an employee should not rely on them for financial support in case of an emergency.

4. Restricted Stock Award (RSA):

Even though they might sound similar, Restricted Stock Awards are actually very different from

Restricted Stock Units. While RSU is a mere promise of giving stocks once a specified time period is

over or achieved a performance goal (or both in some cases), RSA actually issues stocks to the

employee immediately, allowing them to own the share with all its associated benefits, including

voting rights and dividends from the grant date.

But why is this option called “restricted” if it grants full ownership benefits? Because it still comes

with a vesting period during which the employee is not allowed to sell the shares in the open

market. Employers may set some conditions, which, if not met, or the executive leaves the

organisation before the vesting period is over, stocks can be forfeited or repurchased by the

company.

5. Stock Appreciation Rights (SARs)

If a company wants to give out stock benefits to its employees but does not want the shares to be

liquidated, then SARs are the best choice. SARs grant the employee the right to receive an increase

in the price of the company’s stock once a specified time period has passed before the expiration

date.

Where this plan differs from the regular ESOP is the employee does not pay any exercise price (as no

actual shares have been granted); they just receive the value increment of the allotted stocks in the

form of cash or shares.

6. Phantom Equity Plan (PEP):

PEP and SARs are often used interchangeably; however, there is a subtle difference. Like SARs,

Phantom Equity Plan also does not involve any real stock and only pays the increased share value
benefit to the employee. But at the same time, PEP mimics a bonus (rather than a stock option) that

companies award to employees at a predetermined future date (subject to fulfillment of some

conditions) and do not allow employees to exercise at their will within a given time.