Employee stock option plan v/s Employee stock ownership plan

Employee stock option plan and employee stock ownership plan are considered as one but these two terms are very different.

Employee stock option plan v/s Employee stock ownership plan:

Employee stock option plan

Employee stock option plan is a contract between a company and its employees that gives employees the right to buy company’s shares at grant price. Grant price (also known as exercise price) is the price which is decided by the company. 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.

Employees get benefited from this plan when market price of shares are higher than the grant price.

Employee stock ownership plan

Employee stock ownership plan is a retirement plan in which an organisation distributes its share among its employees. These shares are held in common account and transferred to the employee’s account upon entitlement. In this plan, employees never purchase the shares directly or indirectly. These shares are transferred to employees account when they retire/ terminate from the company.

Employee stock ownership plans are used by companies for a number of reasons. For example to keep the morale of employees higher.