Find out vital information of the Employee Stock Ownership Plan

Employee stock ownership plan pros and cons

Employee Stock Ownership Plans also known as ESOP are retirement plans that are designed to transfer shares of ownership of the company to employees. Though these programs can be used by the closely held businesses who provide a market for their employee's shares, it is widely employed by the publicly traded companies. A company will borrow cash from investors or shareholders who are selling their shares and then loans the ESOP funds with the sole purpose of acquiring shares. The ESOP loan is then paid out and shares allocated to employee accounts in proportion of their compensation. The employees then are in place to receive cash in exchange for their shares upon retirement or termination.

The Pros of ESOP

  • Tax Benefits -These benefits come with all qualified plans like tax defied growth and deductible contributions that also comes with the ESOP plans.
  • Staff Motivation - Due to the shared ownership of the company, ESOP plans will help to increase employee retention and productivity. The growth of businesses is also eminent in them that utilize this program.
  • Dividends - Employees enjoy dividends which are either paid directly in cash or used to purchase more shares.
  • Liquidity - ESOP plans are highly beneficial in creating a liquid market for the company stock that helps employees sell their shares.
  • Voting rights - ESOPs give employees a right to vote on the shares they currently receive and determine the future of their market.
  • An opportunity to invest - Employees are presented with an excellent opportunity to spend where they work with EPOS being a systematic saving program.
  • Generates wealth - The long term benefit is that though the payments may be a bit lower, they can accumulate and create wealth that will help the employee in their retired days.
  • No broker's fees - The employees are at privileged to invest without having to pay the hefty fees of the brokers.

The Cons of ESOP

  • Lower payout - The share price that the workers end up getting is not as good as the stock is publicly traded.
  • No diversification - ESOP plans are entirely funded by the company mostly overweighing the employees in their investment decisions.
  • Cash flow difficulties - Repurchasing of a vast number of shares may be complicated if several employees take their distributions at the same time.
  • High expenses - Companies implementing ESOP plans always go through such high costs in creation and administration costs.

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