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What is an Employee Stock Ownership Plan (ESOP)?

2017-04-16T13:27:23+00:00

The term 'Employee Stock Ownership Plan (ESOP)' is included in the Economics edition of the Financial Dictionary. Get yours now on mazon in ebook or paperback format. Read more here...

An Employee Stock Ownership Plan refers to a type of retirement plan. They are also called by their acronym ESOP. These plans permit employing companies to either provide cash or stock shares directly to the employee benefits plan. These plans hold one account for every employee who participates in them. The stock shares that the employers contribute become vested over a pre-determined period of years.

Once they are partially or fully vested, employees are able to access them. It is important to note that with these ESOPs, employees never actually hold or purchase the shares of the stock directly when they are employees of the firm. Once the employee becomes retired, fired, disabled, or deceased, the stock shares become distributed.

One should never confuse an Employee Ownership Stock Plan with an employee stock option plan. These stock option plans are not really retirement plans. Rather they only provide the right to purchase the company stock for a given, pre-determined price in a certain time period.

One benefit that makes these Employee Stock Ownership Plans popular with providers and participants alike is their tax advantaged status. The reason they are considered to be qualified is because the company participating, the shareholder who sells, and the participants are each able to enjoy varying tax benefits. This is why these ESOPs are typically utilized by companies as part of their corporate financial strategy at the same time they are employed to encourage the employees to be sympathetic to the company stakeholders and their interests.

Without a doubt, the Employee Stock Ownership Plan is part and parcel of the compensation that employees enjoy from their company. This is why they are utilized to keep the employees working for the overall good of the company as a whole. They have a stake in the stock share price rising over time since they are part owners in the company stock.

These benefits from the Employee Stock Ownership Plan accrue to the employees at no upfront cost. The shares are kept for the receiving employees in a trust to ensure they grow safely to the point where the employee resigns or retires (or is fired).

These companies are actually employee-owned to some degree. Employee-owned corporations are those that have a majority of their shares in the hands of the company employees. This makes them cooperatives but for the fact that the firm’s capital is unevenly distributed. Much of the time, such employee-owned corporations do not provide voting rights to all of the shareholders. Besides this, the senior-most employees and management will always have the distinct advantage of receiving a greater number of shares than the newer employees.

There are several other competing forms of employee ownership benefits. Among these are stock options, direct purchase plans, phantom stock, restricted stock, and stock appreciation rights. Stock options give their employees the chance to purchase shares of company stock for a set price in a fixed amount of time. A direct purchase plan permits employees to buy their shares in the company using their own after tax dollars.

Phantom stock delivers special cash bonuses in reward for superior employee results. The bonus amounts equal to the sale price of a certain quantity of stock shares. Restricted stock provides employees the ability to obtain shares either in the form of gift or by buying them, once they have met certain minimum employment period benchmarks. Stock appreciation rights provide employees with the ability to increase the value of a pre-assigned quantity of shares. Such shares typically become actually payable in the form of cash.

The term 'Employee Stock Ownership Plan (ESOP)' is included in the Economics edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.