Employee Stock Option Plan (ESOP) is a method through which a company awards Stock Option to its employees based on their performance.
ESOP is a contract that gives employees the right, but not obligation, to purchase or subscribe to a specified number of shares of the company at a fixed price, that is, the exercise price. The exercise price remains fixed even if the market price goes up in future. the price is determined by a Registered Valuer.
There are 2 methods of doing ESOP Valuation:
- INTRINSIC VALUE METHOD
Intrinsic value is the excess of the market price of the share under ESOP over the exercise price of the option (including upfront payment, if any)
- FAIR VALUE METHOD
It takes into account factors like Time Value, Interest Rate, Volatility, Dividend Yield etc. for the estimation of Employee Compensation cost.
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