Employee Stock Ownership Plan (ESOP) is a worker benefit program. It allows workers to own part or all of a company’s stock. It is designed to encourage productive work and reward length of service.
An ESOP borrows money from a bank or other commercial lender to buy stock in the company. It repays the loan from money the company contributes to the ESOP out of earnings and profits. The company may deduct a certain amount of the ESOP payments from its annual taxable income. Every year, the ESOP gives participating employees shares of the cash and stock it has acquired in the previous year. The number of shares each worker gets is based on the percentage of his or her salary compared to the total amount of salaries of the employees in the ESOP. A trust holds all the cash and stock paid to the ESOP.
Generally, employees gain possession of their stock when they retire or otherwise end their employment. In some plans, they may hold the stock as long as they wish and get any dividends the company pays on it. The employees also may sell or transfer ownership of the stock. The worth of the stock is determined by its fair market value. In some ESOP’s, the company must buy the stock from former employees who want to sell it.
ESOP’s differ from one another according to four main elements. These elements are (1) the amount of worker ownership of the company, (2) whether workers have voting rights for their stock, (3) the degree of worker control of the board of directors, and (4) the degree of labor-management cooperation to achieve goals.
Louis Kelso, an American lawyer and investment banker, created the ESOP concept during the 1950’s. In 1974, Congress passed the first of several laws that provide tax incentives for firms that form ESOP’s. Today, the United States has about 7,000 ESOP’s, with about 10 million participating workers.
