Employee stock ownership plan or more generically called ESOP in simple terms is an incentive scheme offered by companies for their employees. After all, the ultimate goal of a company is profitable growth, which is measured by increased shareholder value. As such, they give their employees the opportunity to be shareholders.
In layman’s terms, increased shareholder value means increased prices of the company stocks, not because of speculation. But backed by strong company performance, potential and prospects. Increased shareholder value means the money invested and put up by the company owners is growing and earning, vis-a-vis the company growth and earnings. This share price is more visible (whether growing or not) if the company is publicly listed, such as the PSE.
And so, some companies offer ESOP to its employees, to allow the employees to own a very minority share of the company. Through this, the goal is to enhance the sense of ownership of the employees, not only because they get their monthly salaries from the company, but more so because they own part of the company, no matter how small. So if your employer offers ESOP, and your company is growing, and you have plans to stay for the medium-term, I highly encourage you to avail of ESOP.
An interesting variation of ESOP is what other companies call sharesave (usually foreign companies). Sharesave is similar to ESOP in a sense that the end goal is to own company shares of stock. The variation is that the stock is not bought now but at a predetermined time in the future.
Usually, companies offering sharesave will give their employees a share option, at a discount. Share option means at an agreed time in the future, the employee will have an option whether to buy shares of stock or not. Exercising the option simply means buying the stock when the agreed future date comes. Note that you have an option, but you are not obliged to. In an option you have flexibility. At a discount means the stock price offer now is discounted of current levels.
For example, if a stock today sells at P10 per share, a sharesave from a company may offer the stock at P8 per share, giving you a P2 discount. However, that option to buy at P8 and not at P10 may only be exercised in the future, for example a year from now. What you will do from now until a year from now is to give monthly savings/salary deductions. These deductions will be the money used to buy the stocks at P8 per share one year from now, assuming you exercise your option by then.
What are the advantages? Since it as an option, you are not obliged to buy the stock. You just have the option to buy it in the future at predetermined prices today. If a year from now, stock price goes up to P15, your option to buy at P8 still holds so you already have P7 profit per share. Chances are you’ll exercise the option. But if a year from now, the stock price drops to P5 per share, your options are to buy at P8 or not to buy at all (and just have all the deductions returned to you ). If the latter is the case, chances are you will not exercise the option and just get your money back.
Whether it is ESOP or sharesave, the risk remains that the investment is tied to shareholder price. Again, even if the main goal is to increase shareholder value, this does not happen always. There are times when stock prices are really just weak and down-to-earth.
But if you’ll ask me, and if I have the money, I will join ESOP or sharesave, and keep a hold on it until they peak. Or as long as I am employed in that company.