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Employee Stock Ownership Plans (ESOP)
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Payroll Home » Compensation » Incentive Management » Employee Stock Ownership Plans
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Employee Stock Ownership Plan (ESOP) is an employee benefit plan. The scheme provides employees the ownership of stocks in the company. It is one of the profit sharing plans. Employers have the benefit to use the ESOPs as a tool to fetch loans from a financial institute. It also provides for tax benefits to the employers.
Organizations strategically plan the ESOPs and make arrangements for the purpose. They make annual contributions in a special trust set up for ESOPs. An employee is eligible for the ESOPs only after he/she has completed 1000 hours within a year of service. After completing 10 years of service in an organization or reaching the age of 55, an employee should be given the opportunity to diversify his/her share up to 25% of the total | |
value of ESOPs. Law has also provided an amendment for the employees who have attained the age of 60 and their ESOP shares are allotted after December 31, 1986. The amendment provides those employees with an option to diversify their shares up to 50%.
Advantages of an ESOP
Figure: Advantages of ESOP
Disadvantages of an ESOP
Figure: Disdvantages of ESOP
Individual employees’ accounts are credited with the stocks acquired by ESOP. They can also acquire stocks through stock options. Stock options provide employees the right to buy shares at a definite price* for a defined number of years in future.
*(Price for the current day i.e. the time the options are acquired is set as the definite price for the employee.)
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