Employee Stock Option Plan (Chapter: Share Capital Class 12)

EMPLOYEE STOCK OPTION PLAN

Employee stock option plan is an option given by the company to its employees to subscribe to the shares of the company.

Now why the company gives option to its employee:

It will create a sense of belongingness among employees. They will feel committed towards the company. It is a kind of non cash incentive to the employee.

Why would the employee purchase the shares since he is already getting his salary?

The answer is shares are offered at a price less than the market price of share so in this employee gets a benefit. Instead of buying shares from market he is getting shares at less than market price. The price offered by company is called Exercise Price.

The difference between exercise price and market price is treated as an expense by the company.

For accounting entries stay tuned. I will post it soon.