Employee Stock Ownership Plan(ESOP) How It Works?

Employee Stock Ownership Plan

What is Employee Stock Ownership Plan?

An employee stock ownership plan ESOP is a strategy for compensation and award for the employee,
for their years of contribution hard works, and dedication towards the company.
wherein, the company board decides to reward the employee by providing certain shares
of the company.

In other words, ESOP is an employee benefits plan, it works as an investment tool,
wherein it represents the loyalty of the employee towards the company.

How Does The Employee Stock Ownership Plan Work?

Well, the company creates ESOP to helps the employee to buy the stock,
the Company opens a trust account wherein the employee can invest to buy the stock,
and then the employer matches the same amount as the employee is investing in.

Most of the time the company provides the stocks to the employees as awards as well,
however, the employee can not sell the stocks nor exchange.
If the employee leaving or retiring in that case the company buys back those shares from the employee,
with a fair compensation or at the market price.

These Shares are provided to every employee over the years of services, there are various methods of allocation,
The most commonly used form is the percentage of salary and the total number of services left.

This helps in reducing the tax to both company and employee, and it becomes an asset to the employee,
if the stocks are performing well it will be a secondary source of income.

Benefits of Employee Stock Ownership Plan: 

Benefits of ESOP to Employees:

 

  • Wealth generation:

It helps the employees to generate an additional source of income,
some of the high-performing stocks are expensive to buy, with the help of ESOP,
the employees did not get an additional source of income, but also is introduced to investing.

  • Comfortable Retirment:

Well, with the help of ESOP the employer contributes the employee’s fund,
by matching the amount invested by the employee in the ESOP trust account,
it provides the employee a grantee that by the time of retirement, there will be enough
earning to spend his life.

  • Helps Employee to Enhances the performance:

Well, the ESOP (Employee Stock Ownership Plan) enhances the performance of the employee,
usually, Stocks are provided on the basis of the performance or it creates a healthy computation
between the employees that will encourage the motivate another employee to do well.

  • Tax Benefits:

Well, there is always huge tax benefit to the employee on his salary,
because due to the ESOP there is a consideration of investment,
so, there is a tax benefit to the employee and the employer.

Benefits of ESOP to Employer:

 

  • Boost in the Value of Stock:

since the employees buy the stocks of the company, there is variation in the value of the stock,
which will lead to higher sales or an increase in the value of stocks. which means increase
in the value of the company.

  • Increase in Productivity:

An ESOP works as a reward factor, most of the employee get motivated to earn that reward,
which will create healthy competition between the employees, which will indirectly lead
to increase productivity.

  • Tax Benefits:

The tax benefits are not only applicable to the employee but also to the employer as well,
as the company contributes towards the plan, the company collects the tax rebate on that.

 

Disadvantages of ESOP:

 

Limited Diversification:

The company only provides the stock of their own company, the employee can’t even
sell the stocks, which means there are no chances of diversification.
which means it is only helpful if the stocks perform well.

Dilutive:

ESOP is dilutive, the word dilutive means decrease in the value of the share,
because the company keeps acquiring the share from the market, indirectly it seems
that the company is promoting the share by buying back the share increasing the value
of the shares.

Employees Investment:

The company provides the share to only those employees who are with the company for a longer period of time,
but the employees have to invest in the company by himself to a certain amount,
to get the benefit of the remaining half from the employee.

 

Conclusion:

In summary, about Employee Stock Ownership Plan is one of the suitable plans for retirement,
but also, on the other hand, it only benefits to when your company performs a better in the market,
so, instead of investing in this kind of plan creating our own portfolio makes a huge impact on your
retirement, but if the company is providing you these stock as a reward then accept them
because they are a few sources of income.

[ Read More: Things to be considered While creating your portfolio ]

 

[ For More: ESG Investing All You Need To Know ]

 

[ Read More: 5 Things to Keep in Mind Before Investing in Debt Funds ]

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