An employee stock ownership plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company in the form of shares of stock.
ESOPs were created by the 1974 Employee Retirement Incomes Security Act (ERISA). Today about 6,460 ESOP plans exist in the U.S., covering 14.2 million people, according to the National Center for Employee Ownership (NCEO).
Companies usually adopt ESOPs for reasons such as succession planning, productivity improvement, tax advantages, turnover reduction, fundraising, defense against hostile takeovers or providing employee benefits.
An ESOP is a benefit plan that gives workers ownership interest in the company in the form of shares of stock.
Companies typically tie distributions from the plan to vesting, which gives employees rights to employer-provided assets over time.
ESOPs can vary in terms and rules and can be used by companies of all sizes, including large publicly traded corporations.
ESOPs are almost never used to save troubled companies, according to the NCEO, but are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars.
In almost every case, ESOPs are a contribution to the employee, not an employee purchase, the NCEO said.
Proponents claim that employee ownership can increase efficiency by giving employees incentives to work harder and smarter and to cooperate with the management and each other. Since higher stock prices and more dividends mean more income for employees, employee ownership can motivate employees to work voluntarily harder, according to a 2004 Rutgers University study.
This study also determined that employee-owned companies survive longer and are more stable,
A 1997 Washington State study determined that ESOP participants made 5% to 12% more in wages and generated almost three times the retirement assets as workers in comparable non-ESOP companies.
When vested employees retire or leave an ESOP company, the employees receive their shares' cash value in the form of a lump sum or periodic payments, depending on the plan.
Private companies must have an annual outside valuation to determine the price of the shares.
In private companies, employees must be able to vote their allocated shares on major issues, such as closing or relocating the business, but the company can choose whether to pass through voting rights on other issues, such as for a board of directors, according to the NCEO.