An Employee Stock Ownership Plan or esop is a plan for the benefit of employees and workers in a company, as it gives them an ownership interest in the company. The employees receive interest in the form of shares and stocks of the company. The workers or employees of a company get the benefit of owning the shares of stocks.
The most important benefit of ESOP is that it allows the company owner to sell their shares and move out of business easily. It is known as succession planning by the company owner. ESOP is a useful tool for any company, as they can use the shares and stocks to sell them to the ESOP and get rid of their debt. It also helps in customer retention, assures job security, and provides advantages in tax.
Working of an Employee Stock Ownership Plan:
- First of all, the company starts an ESOP trust, where they can either sell or buy stocks and shares of the company. The company owner can either buy shares of stocks from the existing owner of the company or sell their shares to the owner in exchange for cash.
- If the company doesn’t have the money currently to buy shares of stocks, the ESOP can take a loan from the bank. The company will then contribute money to the ESOP trust so that it can pay its loan.
- The employees of the company get their shares in the ESOP trust, owning some part of the company. The shares increase as the tenure of employees also increases; an employee working for a long time ends up owning the business.
- The shares are given to employees relatively according to their pay. Full-time employees receive more shares than part-time employees. All full-time employees over 21 get the chance to participate in the ESOP.
- The employees, who end up owning some part of the business, are also granted participating as well as voting rights. The voting results are delivered accurately using the scrutineering services so that any employee does not get cheated during share distribution.
- After an employee leaves the company, he or she gets their share of stocks. If he or she wishes to sell these stocks back to the company, the company needs to buy them at fair market value currently. So, the worker gets his or her share of stocks in the form of money, from the company.
- If there is a public market for buying and selling stocks, the employee can sell their shares of stocks, if the company does not pay according to the fair market price.