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.

ESOP and Other Forms of Employee Ownership

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 versions of employee ownership include direct purchase programs, 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.

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RELATED FAQS
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