Employee stock ownership plan. Top 10 advantages and disadvantages

From a fundamental point of view, Employee stock ownership plan (ESOP) is a benefit plan given to an employee to allow employee take an ownership interest in the company. ESOP is a useful program that helps the HR to align your organization goals with your employees’ goals. Employees can become an owner of shares in the company he/she works for. From a different point of view, the ESOP is part of a compensation plan to the employee after the retirement. However, it is unique when compared to other benefits plan as:

  1. The law inquiries employer to use ESOP as a security plan for your engagement with the organization.
  2. With ESOP you have the ability to ask for a loan.

For the employees who are thinking about using ESOP as an exit plan, here are some few Employee stock ownership plan advantages and disadvantages of the strategy.

Benefits of ESOP

  • Tax deductible benefits- the owner of the stock can sell some or even all the shares to the employees free.
  • Increase flexibility of the proprietor- The owner can gradually withdraw or even at once withdraw from the organization. You can sell all your shares to an ESOP and remain part of the company.
  • Allows continuity in the management-Though you are withdrawing from an organization, employee forming a new ESOP will stay in their position allowing a smooth transition.
  • Benefits- as an employee exist, you are assured that you are going to receive benefits.
  • Ready market and buyer- For the owner, you have a ready market and a buyer of your shares.
  • Ensure long-term business- An ESOP ensures the employee are not willing to sell their business soon.

Disadvantages of ESOP

  • Sales Management- in an ESOP, all the participant must vote for any sale of the business assets to be made. Sometimes, it may lead to consultation with an external expert.
  • Transaction risk- sometimes it may result in the loss of a good profitable deal. Buyers may be impatient with the delay caused by external advisors.
  • Cash flow drain- as the ESOP will receive different percentages of the income, the amount being reinvested back to the business may become limited putting the business at risk.
  • Stock performance- if the company does increase value, the employees may lose interest on the ESOP and look for more improved benefits plans.

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