ESOS

What is ESOS?

An employee share option scheme (ESOS) is commonly viewed as a complex call option on the common stock of a company, granted by the company to an employee as part of the employee’s remuneration package. Regulators and economists have since specified that “employee stock options” is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options but are not in and of themselves options (that is they are “compensation contracts”).

Employee Share Options are non standard contracts with the employer whereby the employer has the liability of delivering a certain number of shares of the employer stock, when and if the employee share options are exercised by the employee. Traditional employee share options have structural problems, in that when exercised followed by an immediate sale of stock, the alignment between employee/shareholders is eliminated. Early exercises also have substantial penalties to the exercising employee. Those penalties are a) part of the “fair value” of the options, called “time value” is forfeited back to the company and b) an early tax liability occurs. These two penalties overcome the merits of “diversifying” in most cases.

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