Employee Stock Ownership Plans are a unique way to provide your employees with additional benefits and interests in the company. They are also a great way to motivate and align the interests of employees with that of the company and shareholders. With stock in the company, employees are also shareholders. This article will explain what Employee Stock Ownership Plans are and why you should consider them.
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Get startedWhat is an Employee Stock Ownership Plan?
Employee stock ownership Plan’s are employment benefit plans that gives employees ownership interest in the company. Commonly referred to as ESOP’s. Employees receive shares in the company as a fringe benefit. This is in addition to their wage or salary. Public companies generally have a limit on the total number or percentage of the company’s shares that can be acquired by employees.
Upfront Costs and Distribution
Shares are provided at no upfront cost. Companies often also place the provided shares on hold in a trust. This is done for their safety and growth. Shares held on trust are held until the employee retires or resigns from the company. The distribution of shares that can be earned each year from the plan are typically tied to vesting. Vesting here is the proportion of shares earned for each year of service. When the employee retires or resigns, the company purchases the “vested” shares from them. The employee receives money from the purchase in a lump sum payment or equal periodic payment. When employees resign or retire, they cannot take the shares of stock with them, only the cash payment.
Why you should consider an Employee Stock Ownership Plan
An employee stock ownership plan can prove to have many benefits for the wider company and its workforce. These can be used as a source of corporate finance They are also a great way of improving employee motivation and commitment within the company. Furthermore, in an era of ‘side hustles’ and projects, stock ownership plans improve loyalty and engagement.
By having a share interest in the company the performance of it has a direct impact on employee renumeration and benefits. When the company performs well, so do the shares of employees. This way there is a direct link between employee performance and renumeration. In this same way stock ownership plans are great for aligning the interests of employees with those of shareholders. This encourages employees to act in a way that has the best interests of the shareholder’s in mind, since they themselves are shareholders. Stock Ownership plans in these ways are great in keeping the focus on corporate performance and share price appreciation.
Some companies use these stock ownership plans as a way of fostering and supporting a company’s culture. Where employees have larger and more substantial stakes they also have a more active role in the company and a more meaningful voice.
