ESOP is an employee benefit plan that gives workers ownership interest in the company. Companies often use ESOPs as a corporate-finance strategy to align the interests of their employees with those of their shareholders.
Employee ownership is a proven model to build healthy companies and workers who are highly satisfied with their jobs. Employees can see a direct link between the work they do every day and the overall health of their company, it provides a powerful incentive for them to do well so the company does well, which then rewards the employee-owner.
Outside of that, ESOP can provide an employee with significant retirement assets if one is employed by the company for a significant period of time and the employer stock has appreciated over the years to retirement. From another point of view, ESOP is how founders attract the employees who are going to help build the company.
There are several types of employee ownership:
- Direct-purchase programs
Employees purchase shares of their respective companies with their personal after-tax money. Some countries provide special tax-qualified plans that let employees purchase company stock at discounted prices.
- Stock options
- Provide employees with the opportunity to buy shares at a fixed price for a set period while phantom stock
- Restricted stocks
Restricted stock gives the employees the right to receive shares as a gift or a purchased item after meeting particular restrictions, such as working for a specific period or hitting specific performance targets.
- Phantom stocks
Provide 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. Companies usually pay these shares in cash.
However, ESOPs have complex operating rules and require significant oversight. If the company does not staff the ESOP properly, they risk problems and potential violations. Small companies and those with unsophisticated accounting processes are particularly ill-suited to ESOPs because they lack the infrastructure to follow the protocols and provide the required support and information to employees.
With this in mind, we've tried to make the ESOP creation as easy as possible for all parties involved.