What is Stock Incentive Plans?
Stock Incentive Plans (SIPs for Businesses, as we call it) means an employee benefit plan by creating ownership pattern for the employees of an Organisation and making them business partners. It is aimed at associating people for long term, motivating them and making them business partners for over all growth of the Organisation. As a Systematic Investment Plan (SIP) in mutual funds creates wealth for an individual in long term, similarly SIPs for Businesses (Stock Incentive Plans) create wealth for an Organisation in the long run coupled with the value creation for the people associated with it.
Kind of SIPs:
ESOP: Employee Stock Option Plan, under which stock options are granted to an employee which will vest in him over a defined period at a pre-agreed price or pricing formula. The employee gets the right to apply for equity shares once the said lock-in period is over.
ESPS: Employees Share Purchase Plan, under which equity shares are allotted to an employee which are subject to certain lock-in period.
SAR: Stock Appreciation Rights, under which a right is conferred to an employee to gain monetary benefits arising out of increase in the price of equity shares and such monetary benefits may be settled in cash or kind.
RSU: Restricted Stock Units, are units granted to a participant, but shares are not issued at the time of the grant. After the participant of a RSU satisfies the vesting requirement, the company distributes shares, or the cash equivalent of the number of shares used to value the unit.
RSA: Restricted Stock Awards is a grant of companys shares in which the recipients rights in the shares are restricted until the shares vest (or lapse in restrictions). The restricted period is called a vesting period. On completion of the vesting requirements, the employee has the right to own and deal with his shares independently.
There can be further variations created in the SIPs, depending on the requirement of the Corporate to device a new structuring suiting to each Corporate.
Other basic terms associated with an SIP are:
Grant Date: It is the date on which options are deemed to be granted to an employee
Grant Price: It is the price at which the options are granted to an employee and by paying which he can own equity in the Company. It is also referred to as Exercise Price
Vesting Period: It is the period for which an employee should be associated with the Company to become eligible to apply for equity shares under SIP. The minimum required period is one year.
Vesting Date: It is the date on which the Vesting period is over.
Vested Options: It refers to the options for which the Vesting Period has been successfully completed.
Exercise: It refers to the act of applying for equity shares in the Company after completion of the Vesting Period.
Exercise Period: It refers to the period within which, after completion of the Vesting Period, the employee can exercise his Vested Options.
Unvested Options: It refers to the options for which the Vesting Period is still continuing.
Intrinsic Value: It is the difference between the fair value of equity shares on the date of grant of options and the exercise price.
Fair Value: It is the value of an option generally derived through Black Scholes Option Pricing Model or in certain cases through Binomial Model. This method derives value of an option after considering various parameters like fair value of equity shares, exercise price, volatility, dividend yield, risk free rate of return and life of options.
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