Employee Stock Ownership Plan - ESOP

What is an 'Employee Stock Ownership Plan - ESOP'

An employee stock ownership plan (ESOP) is a qualified defined-contribution employee benefit (ERISA) plan designed to invest primarily in the stock of the sponsoring employer. ESOPs are "qualified" in the sense that the ESOP's sponsoring company, the selling shareholder and participants receive various tax benefits. ESOPs are often used as a corporate finance strategy and are also used to align the interests of a company's employees with those of the company's shareholders.

BREAKING DOWN 'Employee Stock Ownership Plan - ESOP'

Since ESOP shares are part of employees' remuneration for work provided for the company, ESOPs can be used to keep plan participants focused on company performance and share price appreciation. By giving plan participants an interest in seeing that the company's stock performs well, these plans are believed to encourage participants to do what's best for shareholders, since the participants themselves are shareholders. Employees are provided with such ownership often with no upfront costs. The provided shares may be held in a trust for safety and growth until the employee retires or resigns from the company. Once an employee retires or resigns, the shares are given back to the company for further redistribution or are completely voided.

Employee-owned corporations are companies with majority holdings by their own employees. As such, these organizers are like cooperatives, except that the company's capital is not equally distributed. Many of these companies only provide voting rights to particular shareholders. Senior employees may also be given the benefit of getting more shares compared to new employees.

Stock ownership plans provide packages that act as additional benefits for employees in order to prevent hostility and keep a specific corporate culture that company managements want to maintain. The plans also stop company employees from taking too much company stock.

Other Forms of Employee Ownership

Other versions of employee ownership include direct purchase plans, stock options, restricted stock, phantom stock and stock appreciation rights.

Direct-purchase plans let employees purchase shares of their respective companies with their personal after-tax money. Some countries provide special tax-qualified plans that let employees purchase stocks of companies at discounted prices.

Restricted stock give the employees the right to receive shares as a gift or as a purchased item after particular restrictions are met such as working for a specific period of time or hitting specific performance targets.

Stock options provide employees the opportunity to buy shares at a fixed price for a set period of time.

Phantom stock provides cash bonuses for good employee performance. These bonuses equate to the value of a particular number of shares.

Stock appreciation rights give employees the right to raise the value of an assigned number of shares. These shares are usually paid in cash.

RELATED TERMS
  1. Employee Trust

    A trust fund established by an employer on behalf of its employees ...
  2. Corporate Pension Plan

    A formal arrangement between a company and its employees - or ...
  3. KSOP

    A qualified retirement plan that combines an employee's stock ...
  4. Qualified Retirement Plan

    A plan that meets requirements of the Internal Revenue Code and ...
  5. Employer-Sponsored Plan

    A type of benefit plan that an employer offers for the benefit ...
  6. Key Employee

    An employee with a major ownership and/or decision-making role ...
Related Articles
  1. Investing

    A Beginner's Guide to Investing in Company Stock Plans

    There are certain advantages to investing in your employer's stock but there are some potential drawbacks to be aware of.
  2. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  3. Retirement

    What's a Qualified Retirement Plan?

    Employers establish qualified retirement plans to help their employees save money.
  4. Investing

    Get The Most Out Of Employee Stock Options

    Many corporations encourage employees to participate in the company’s growth by offering them a piece of the pie. That means employee stock options.
  5. Investing

    What is a Stock Option?

    An employee stock option is a right given to an employee to buy a certain number of company stock shares at a certain time and price in the future.
  6. Insights

    6 Successful Companies That Are Employee-owned

    A look at six successful privately held companies that are mostly owned by their employees.
  7. Markets

    Split Dollar Life Insurance: How it Works

    Understanding how split dollar life insurance plans are designed and what tax regulations they must follow.
  8. Insights

    Top 10 Companies With the Best Benefits (NFLX, ADBE)

    Find out which companies offer the most unique benefits. Discover the benefits that are most likely to help workers decide to accept a job offer.
  9. Retirement

    Comparing Qualified And Non-Qualified Plans

    Qualified and non-qualified retirement plans are created by employers to benefit their employees.
  10. Retirement

    This Is Why Your Employer Should Offer a 401(k)

    Understand the unique benefits that come with a small business offering a retirement savings plan such as a 401(k) to current and future employees.
RELATED FAQS
  1. Is an ESOP a qualified retirement plan?

    Acting as a qualified stock bonus plan as well as a form of a retirement plan, an ESOP has been a qualified retirement plan ... Read Answer >>
  2. How do restricted stocks, treasury stocks and stock appreciation rights benefit employees?

    Restricted stock represents any equity that is conditionally given or sold to an insider as compensation or as part of an ... Read Answer >>
  3. What does a merger or acquisition mean for the target company's employees?

    Learn about the likely impacts of a mergers & acquisition deal on the target company's employees, their benefits and adjusting ... Read Answer >>
  4. What is the best retirement plan option for a physician with her own practice, employees ...

    It is very unlikely that you will find a qualified plan or an IRA-based plan that will allow the employer to exclude other ... Read Answer >>
  5. Are Simple IRA plans subject to ERISA?

    Learn how the Employee Retirement Investment Security Act, or ERISA, guides the administration of Savings Incentive Match ... Read Answer >>
  6. How do I "vest" something?

    Vesting is a term usually related to pension plans that some employer's provide to their employees.An employer may make contributions ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center