Employee Stock Ownership Plan
What Does Employee Stock Ownership Plan Mean?
An employee stock ownership plan (ESOP) enables employees to acquire shares in the company they work for. The company allocates these shares to employees based on specific criteria, such as seniority or salary. When employees resign or retire, they sell their shares back to the company at fair market value.
Insuranceopedia Explains Employee Stock Ownership Plan
To establish an ESOP, a company creates a trust fund, which then purchases shares of company stock. These shares are distributed among all full-time employees, with the number allocated to each employee based on predetermined factors such as salary or length of employment.
The allocated shares are not taxed. Employees may also have the option to buy additional shares or receive them as bonuses. Over time, employees gain vested rights to these shares and may diversify a portion of them. Shares are typically cashed out upon retirement, resignation, or termination.
Proponents of ESOPs believe they boost productivity by motivating employees to work harder, as the company’s performance directly affects the value of their shares. Critics, however, argue that aggressive and widespread distribution of shares can dilute stock value over time.
