April 07, 2021: Employee Stock Option Plan (ESOP) is a popular method of attracting, motivating, and retaining employees. Stock Option Plans permit employees to share in the company’s success without requiring a startup business to spend precious cash.
Previously, only public companies were allowed to issue employee stock options. As a step forward to facilitate the corporate sector, the SECP hereby clarifies that private limited companies especially startups can also now offer ownership rights to their employees as a non-monetary compensation for their intellectual services and promotion of their business. A private company may offer shares to its existing shareholders in accordance with section 83(1)(a) of the Companies Act, 2017, and if the whole or any part of the shares offered is declined or is not subscribed, such shares can be offered to its employees under pre-determined contractual arrangements.
Option for employees to own a company they work for proves to be a highly motivating factor to increase productivity and efficacy which startups immensely require at their initial stages of business commencement. The trend of offering shares to employees is globally more prevalent in startups that might not be able to afford hefty compensation packages for their employees.
Therefore, in order to accelerate business growth in Pakistan, the SECP has given clearance to private limited companies including startups to offer Stock Option Plans which gives them the flexibility to award stock options to employees.