Employee Stock Option Plan (ESOP) is a compensation strategy that allows employees to acquire ownership in the company through the right to purchase shares at a predetermined price, known as the exercise price, after a specified period called the vesting period. It is designed to align employeesí interests with those of shareholders, motivating them to contribute to the companyís long-term growth and profitability.

Under an ESOP, employees are granted optionsónot shares immediately. Once the vesting period ends, they can choose to exercise the option and buy shares at the pre-decided price, which may be lower than the current market price. If the market price rises above the exercise price, employees benefit from the difference, effectively gaining from the companyís success.

Example: Suppose an employee is granted 1,000 stock options at an exercise price of ?100. After three years, if the market price rises to ?200, exercising the options gives the employee a profit of ?100 per share.

ESOPs serve multiple purposes ó they attract and retain top talent, boost employee morale, and reduce attrition by tying wealth creation to company performance. For startups and growing firms, ESOPs are particularly useful in conserving cash while rewarding employees through potential equity gains.

From a regulatory perspective, SEBI (Securities and Exchange Board of India) governs ESOP issuance for listed companies, ensuring transparency and fairness. Companies must disclose details such as grant dates, vesting conditions, and the total number of shares reserved under ESOPs in their annual reports.

However, while ESOPs can enhance wealth creation, employees should also consider tax implications and potential market risks before exercising their options, as share prices may fluctuate over time.