What’s an ESOP?
Total compensation plans for employees require comprehensive health care options and an active retirement plan in order to entice new recruits. An Employee Stock Ownership Plan is one effective way of adding to an employee’s personal retirement plan while also investing in the corporate structure. An ESOP offers active employees the opportunity to purchase shares of the company they are working for, usually through payroll deduction methods. This stock ownership plan has a few complex caveats but does offer a variety of benefits to employees who take advantage of them, as well as employers who offer them.
How Employees Benefit From an ESOP
When employees participate in an ESOP, they increase their overall investment in the company that employs them. Employees literally become shareholders in their workplace and can increase their shares through regular payroll contributions. While most companies limit the percentage that an employee may contribute through salary deductions, employees are generally not restricted from purchasing additional shares through an outside source. One of the main benefits of purchasing shares of a corporation through an ESOP is the share price. Employees typically buy shares at a discount, and this can continually decrease their cost basis. Over time, the compounded effect of these contributions can significantly impact a retirement savings plan.
One of the main benefits that employers receive from setting up an ESOP is control of the treasury. They are able to maintain a portion of shares to be used specifically for this purpose. In the same way that employees recognize tax-free growth of shares from their retirement plan, the company receives huge tax benefits as well. Essentially, the ESOP operates as a separate entity from the corporation and any qualified retirement plan. In this stand alone function, it can order up shares, recall shares, manage loans, and perform other types of financial transactions. This autonomy allows the company to take out a loan and use treasury shares as collateral or repayment. Each of these transactions can be strategically timed to coincide with the best time to buy or sell the underlying shares of the corporation.
Mutual Benefits of an ESOP Offering
Although the costs and fees associated with creating and managing an ESOP are quite hefty, the long-term benefits generally outweigh these costs. Pre-tax deductions for employees and tax deferred growth and trading for employers enable ESOPs to become one of the most lucrative stock trading options for both parties. Through a well managed ESOP, companies can share their earnings with current and retired employees. This token of appreciation is often a substantial incentive for employee shareholders to continue their investment. ESOPs are also an effective way for companies to plan for future growth without relying on external investors who may wish to have their opinions taken into account in regards to company decisions.
Voting rights may be assigned to employees and ESOP partners when they reach a certain number of shares owned. This could lead to a substantial percentage of ownership in the company, which comes with even more leadership benefits. The idea of ownership rights has a specific and well-researched psychological affect on employees. The ability to purchase company stock, especially at a discount, enables employees to develop the mindset of an owner. This subtle shift increases a sense of loyalty among employees because they begin to feel a renewed sense of pride that causes them to take action with the entire company in mind. Switching this focus from exclusively self to a social and corporate oriented mindset increases production and satisfaction among all employees in the workplace.