What is Employee Stock Ownership Plan (ESOP)
ESOP is Employee Stock Ownership Plan; this employee ownership can be accomplished in a number of ways. Employees can receive stock options, buy stock directly, get stock through a profit sharing plan or be given it as a bonus. Overall, ESOP is an employee benefit plan that provides company workers with an ownership interest within an organization.
ESOP is also referred to as a Stock Purchase Plan, where employees become owner through worker cooperatives where each employee has an equal vote. Also, these are never used to save troubled companies. It is used to provide a market for the shares of departing owners of successful companies and reward employees in the form of incentives etc. More or less but ESPOs is a contribution to the employee, not an employee purchase.
How ESOP works?
An employee who has been associated with an individual company for years of duration are eligible to be get allocated for a certain number of shares of the company. The share allocation is based on the pay scale of an individual. It is beneficial to the company and employee. There are always pros and cons of everything and so of ESOPs. It is not only beneficial but also associated with some drawbacks.
Benefits of ESOPs
To enhance the investments of employees, ESOPs are designed. This results in a positive outcome for the organization. More or less, but if an employee owns stock in the company, then he(s) feels motivated, and always look forward towards company success. As well, employees who own stock in the company have an incentive to remain at the company, which could reduce employee turnover.
There is an ESOP trust where each employee shares are held until the employee retires or leave that company. Employees are free to sell their part of share either on the open market or back to the company. Also, there is no scope of taxed until they sell their part of shares.
Drawbacks of ESOPs for Employees
Many employees do not use a diverse form of an investment portfolio, which uses ESOPs as their major form of saving. It’s like one is putting all its saving in one single basket. Most financial planners caution investors who invest more than 10% of their assets in company stock.
In case if company end up with poor performance then the employee may find themselves losing equity as well as potentially laid off. Nut there’s always a counterbalance of everything, and so of it. The employees of Employee Stock Ownership Plan companies receive good employer contribution on average to saving plans than the workers for non ESOP companies.