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Factors to consider while adopting ESOPs

Personal factors

  • Financial situation
  • Tax bracket
  • Net worth
  • Objectives
  • Acceptable level of risk
  • Need for cash

External factors

  • Opportunity of investing in other instruments and their return in comparison with risk
  • Prospects for an increase in value of the company’s stock

Importance of understanding ESOPs

As an employee of a company whose stock is publicly traded, you may earn benefits. However, choices are available with respect to:

  • The timing of your stock option exercises (say, you have 3 months exercise period for ESOP. You have to decide the time to exercise the option to the utmost profit)
  • Whether to hold or sell acquired shares (they affect your overall financial security.)
    Therefore, it is critical that you understand the potential effects of these decisions before taking actions.

To maximise the benefits of ESOPs

To maximise the potential benefit, you need to consider numerous factors:

  • Quantify the decision after factoring
  • Specific tax bracket
  • Anticipated values of company stock options
  • Targeted rate of return on other assets
  • Coordinate these decisions with respect to your overall financial needs and long-term goals
  • Facilitate wealth management, as company stock options will form a significant portion of your net worth

Each corporate compensation award programme is unique. Likewise every individual has concerns specific to his/her financial situation. It is important to review your stock option awards in the context of your overall financial picture.

 

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