Employee Stock Option Plan (ESOP) is a corporate scheme in which sponsoring company distribute its share to the employees free of cost or at a price lower than market price. The price so decided is known as grant price or exercise price. This right can be exercised within time frame imposed by the company and only a fixed number of shares can be purchased by the employee.
Sometimes these shares are funded by bank loan taken by the employer. Dividend on these shares is then used to pay the loan amount.
Employees get benefited from this plan when market price of shares are higher than the grant price. This scheme is used by companies to retain its employees and to boost the morale of employees.
Difference between employee stock option plan and employee stock ownership plan
Employee stock option plan is differernt from the employee stock ownership plan in which shares are transfered only when an employee seperate from the company.
For more details please refer the article – Employee stock option plan v/s Employee stock ownership plan