The risk of key employees leaving is a costly affair for the company, given the cost of replacing them. In addition, there is a risk that the employee leaves with the know-how to a competing company or starts it himself. Therefore, employers often solve how to effectively avoid this situation legally, fiscally and economically. A properly set up ESOP, or Employee Stock Option Plan, can be the solution.

ESOP (from the English "Employee Stock Ownership (Option) Plan") can be simply described as a plan for wider ownership/ownership participation of employees in companies. In the business community, it used to be understood as a tool for startups, but that is no longer the case. It is a program that allows employees to acquire a stake in the company in which they work. The benefit of ESOP is its flexibility and the possibility of individual adaptation to a specific situation.

WHAT BENEFITS DOES ESOP BRING?

An ESOP offers a number of benefits, namely:

Motivation and loyalty of key employees
An ESOP motivates employees by directly connecting them to the company's success. As the company grows and its value increases, so does the value of the employee share or options. In addition, the profit share that belongs to the employee thanks to the share also increases.

Employees who have a stake in the company and its profits naturally have higher motivation and loyalty because their performance is directly reflected in the value of their stake as well as the amount of profit share they are paid each year. In this way, ESOP can contribute to better performance and faster growth of the business.

Attracting and retaining talent
ESOPs are considered one of the most effective methods for attracting and retaining talented employees. It offers potential employees the opportunity to get a share of the company's growth, which many may find more attractive than a high salary or a number of traditional benefits.

At the same time, the ESOP helps the long-term interest of employees in the company, as it often contains conditions that limit the sale of shares or the exercise of options within a certain time. This means that employees have a strong incentive to stay with the company, contribute to its growth and care about the health of the entire company.

Attractive remuneration and better cash flow
For companies, an ESOP can be an attractive form of compensation that does not require immediate financial outlays. As it often includes options that can only be exercised after certain conditions are met, it can help keep cash-flow under control.

Thanks to ESOPs, it is possible to offer attractive financial rewards in the form of shares, which is often cheaper than increasing labor costs. In this way, employees are offered a successful exit from the company over time, in which they receive proceeds from the sale as compensation for the lower remuneration they received at the time of joining and during their tenure.

VIRTUAL VS. REAL ESOP

ESOP exists in different forms and it is necessary to carefully interpret it for a specific situation. Unfortunately, there is no one magic setting that can be applied to everyone. The basic difference is whether the employee will have the right to acquire a real ownership interest in the company (business share/shares) or will be entitled "only" to a financial reward/income, as the equivalent of his virtual share. In the basic features, we recognize the so-called virtual and real ESOP.

Virtual ESOP
The essence of the virtual ESOP consists in the acquisition of the so-called virtual or "phantom" share. Therefore, the participant of the program does not acquire a real share in the company, but receives certain pre-agreed benefits that normally belong only to partners. Most often, this is an income similar to a classic profit share, which will depend on the economic result or, in the case of an employee's departure in good faith, the payment of the "purchase price" for a virtual share.

Real ESOP
A real ESOP assumes the acquisition of so-called real share by the employee, i.e. the employee becomes a partner. Employee involvement can take place at the level of the operating company or a separate company, the so-called management/employee company.

The employee can be involved, i.e. acquire a share of the so-called immediately or later after meeting the criteria, which are e.g. duration of stay, achievement of set indicators, or a combination, i.e. a part of the share immediately and a part later. With regard to the purchase price that the employee has to pay for the share, it is set differently, but it can be set at the market level or even lower.

In the case of acquiring a stake in the future, it is referred to as the so-called optional program. This is based on the option acquisition mechanism, i.e. after meeting the conditions, the employee receives an option, the right to purchase a share in the company under pre-agreed conditions. The employee may or may not use this right.

When implementing a real ESOP program in particular, it is obvious that the owners (employers) must share part of their share with the employees. Therefore, it may seem that the ESOP program does not bring any benefits to employers (owners), it only deprives them of their assets. However, the opposite is true, the benefits it can bring