Employee Stock Ownership Plan (ESOP) Definition
ESOP Definition in Simple Terms
An Employee Stock Ownership Plan, or ESOP, is a benefits plan that offers employees ownership stock in the company for which they work. This plan gives various tax benefits to the sponsoring company, the selling shareholder, and the participants. Companies of all sizes, including many publicly traded companies, use ESOPs.
Why Do Companies Use ESOP’s
Companies may use ESOPs as a corporate strategy to align the interests of employees with those of shareholders. The idea is that by making sure that employees and stockholders both share the same company goals, it reduces the likelihood of conflicts and maintains a positive corporate culture. In closely held companies, ESOPs are also sometimes used to facilitate succession planning.
Benefits of ESOP’s
ESOPs are set up as trust funds. They are funded by a company depositing newly issued shares, depositing cash to buy existing shares, or borrowing money through the trust to buy existing shares. Employers often offer their employees ownership at no upfront cost, however the shares may be held until retirement or resignation in order to grow. Distributions from the plan may also be tied to vesting, meaning that a proportion of shares is earned for each year of service.
Employee Stock Ownership Program (ESOP) Definition FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.