What is an Employee Stock Ownership Plan?
An employee stock ownership plan or ESOP is an employee benefit plan. It gives employees an ownership interest in the company. It also gives various tax benefits not only to the sponsoring company. The selling shareholder and other participants also enjoy these, making them qualified plans.
A lot of companies use ESOPs as a corporate-finance strategy. It aligns the interests of their employees with those of the shareholders. It gives employees the chance to buy stock to help succession planning. ESOPs encourage employees to do what is best for shareholders since they own shares.
An employee share plan can be set up as trust funds. The company can fund them by putting newly-issued shares into them. They can also put cash in to buy existing company shares. The company can also borrow money through the entity to buy company shares. Companies of all sizes use ESOPs, even large publicly-traded corporations.
ESOP shares are part of the employees’ payment package. Companies use them to keep plan participants focused on corporate performance. Also, for share price appreciation.
ESOP and other forms of employee ownership
Stock ownership plans provide packages that give employees extra benefits that prevent hostility. They also keep a specific corporate culture most company managements want to maintain. Other versions of employee ownership include the following:
- direct-purchase programs;
- stock options;
- restricted stock;
- phantom stock; and
- stock appreciation rights.
Direct-purchase programs
Direct-purchase plans let employees buy shares of their respective companies. They use their personal after-tax money for this. There are counties that provide special tax-qualified plans. They let employees buy company stock at discounted prices.
Stock options
Stock options let employees buy shares at a fixed price for a set period.
Restricted stock
Restricted stock gives employees the right to receive shares as a gift. It can be a bought item after meeting particular restrictions. An example is when they work for a specific period. Another example is when they hit specific performance targets.
Phantom stock
Phantom stock provides cash bonuses for good employee performance. These can become actual shares once the employees meet particular criteria. One such criterion is working for a defined number of years.
Stock appreciation rights
These give employees the right to raise the value of an assigned number of shares. Most companies pay these shares in cash. A stock appreciation right or SAR is a bonus given to an employee. It is equal to the appreciation of company stock over a specified period.
Employee share plans are a means of increasing employee loyalty. They stay committed to the firm, which in turn, reduces labor turnover. By providing incentives to the employees, productivity within the company becomes improved.
These plans have several advantages and disadvantages. Some companies use it as an exit strategy. It is an excellent tool for succession planning, both for liquidity and transition. People with a stake in the business get rewards. You can visit https://boardroomlimited.com.au/corp/services/listed-share-registry for more information.