Employee Stock Ownership Plans (ESOP)
Uploaded by london28 on Dec 10, 2004
Today, trends in management, the economy, and the workforce are changing. Traditional compensation plans such as pension plan are no longer attractive for employees. A movement toward “non-retirement” plans- that is, contribution plans that provide saving and incentive benefits to employees without a specific funding by the employer, such as PROFIT-SHARING PLANS, STOCK BONUS PLANS and EMPLOYEE STOCK OWNERSHIP PLANS. Some of the reasons for this trend include.
1. Increasing acquisition and dissolution discourage long-term employer commitment.
2. Competition and cost pressures to minimize wage and benefits costs.
3. Increased mobility in workforce.
4. Employers are using more part-time employees, leased employees, and independent contractors.
5. Increase in family with two wage earners.
This report will focus on Employee Stock Ownership Plan (ESOP). In an ESOP, the employer contributes stock to the plan. Employer’s contribution are not necessarily dependant on profits; benefits are distributable in the stock of the employer company. There are two forms of ESOP-- a stock bonus ESOP or a leveraged ESOP. In a stock bonus ESOP, the employer contributes company stocks to the ESOT (Employee Stock Ownership Trust) and does not use it for obtaining funds. In a leveraged ESOP the employer can use the plan as a means of raising funds on a tax-favoreds basis. Shares of stock are allocated to participants’ accounts under a formula that must meet nondiscrimination requirements. Some ESOP also provide for after-tax employee contributions or a salary reductions. The value of each participant’s account in an ESOP is stated in terms of certain number of shares of employer stock.
There are benefits to both the employer and employees in having an ESOP.
Some of these benefits to the employer are:
1. ESOP allows an employer to indirectly borrow money from a bank and repay the loan with fully deductible repayment amounts.
2. Company can sell its stock and redeem it without reducing the true value of the stock.
3. The company can increase its working capital, cash flow, and net worth..
4. An ESOP assists in establishing and maintaining a stable, high performance workforce.
5. It can act as a medium to retain desired employees.
6. An ESOP can be a decisive factor in motivating employees and building loyalty.
As stated above an ESOP is also beneficial...