Employee stock ownership plans (ESOPs) are benefit plans that allow employees to own a portion of the company. Each eligible employee receives a certain percentage of the company's stock shares at no upfront cost from the employer; the distribution of shares may be based on the employee's pay scale, terms of service, or another basis. The shares for an ESOP are held in a trust unit for safety and growth until the employee leaves the company or retires, at which point they are purchased back by the company and given to other employees.
An employee stock ownership plan makes investments in the business owned by the employer. Aligning employee interests with those of the company's stockholders is the aim of the plan.
By providing the employees a share in the company, the employees shift from being merely workers to being owners of the company. The plans incentivize employees to do what is best for the shareholders, as they are shareholders as well.
Employee-owned corporations, which are comparable to worker cooperatives, are businesses that are owned by the majority of their employees.
An employee stock ownership plan (ESOP) differs from a worker corporative in that the capital of the business is not allocated equally. Senior employees are allocated more shares than newly hired employees; therefore,
How an ESOP Works
When a company wants to create an Employee Stock Ownership Plan, it must create a trust in which to contribute either new shares of the company’s stock or cash to buy existing stock. These contributions to the trust are tax-deductible up to certain limits. The shares are then allocated to all individual employee accounts. The most common allocation formula is in proportion to compensation, years of service, or both. New employees usually join the plan and start receiving allocations after they’ve completed at least one year of service. The shares in an ESOP allocated to employees must vest before employees are entitled to receive them. Vesting, in this case, refers to the increasing rights that employees receive on their shares as they accumulate seniority in the organization. When employees who are members of the ESOP leave the company, they ought to receive their stock. Private companies are required to buy back the departing employee’s shares at fair market value within 60 days of the employee’s departure. The companies must have an annual stock valuation to determine the price of the shares.