What Does Employee Stock Ownership Plan (ESOP) Mean?
An employee stock ownership plan (ESOP) allows employees to acquire the stock of the company employing them. The company allocates the stocks among the employees according to a criteria (such as seniority or salary). Once employees resign or retire, employees sell their stocks to the company at fair market value.
Insuranceopedia Explains Employee Stock Ownership Plan (ESOP)
To start an ESOP, the company puts together a trust fund. The trust fund then buys shares of company stock. These shares are distributed among all full-time employees. The number of shares allocated to an employee depends on factors determined beforehand. These might include salary or length of employment.
These allocated shares are not taxed. Employees may also buy stocks or receive them as a bonus. Over time, they acquire rights to these stocks. They can eventually diversify a portion of them. These shares are cashed out after retirement, resignation, or termination.
Proponents of ESOP believe that it encourages productivity since employees will be motivated to work harder since the plight of the company affects the value of the shares that they own. Critics point out a lessening value of the stocks if they are aggressively and exponentially shared.