What is an ESOP?
An Employee Stock Ownership Plan, or ESOP, is an employee benefit plan designed to invest primarily in employer stock. As such, it is a mechanism by which employees become beneficial owners of stock in their company.
This means that employees receive company stock as part of their retirement plan.
What are the advantages of an ESOP?
- The individual employee shares in the company’s capital growth. As the company grows in value, the stock grows in value, and the employee’s retirement fund grows along with it.
- The company can benefit from the deferral and reduction of taxes. This isn’t un-American, but if the company can pay less to the government, then it should do that.
- The stock that the employee receives is in addition to their wages. The money used to purchase the company stock for the employee comes from the overall profits that the company made last year, and it is in addition to the wages of the employee.
- The company and employee benefit from the unity and team spirit that exists within a company that has an ESOP. There is greater productivity and motivation, as all employees are working toward a common goal. Employee owners are concerned employees, as their job performance has an impact on the overall success of the company.
How does the Cross Company ESOP work?
Cross Company has established an ESOP Trust, which owns all the shares of the company. The ESOP Trust holds all of the shares and acts in the best interest of the Cross Company employees. Cross Company employees can become a beneficiary of the trust and, through it, eventually gain ownership of the company.
The trust has a set of rules that it operates by, called the Plan Document. To enter the ESOP Trust, a Cross Company employee must be 21 and work at least 1000 hours.
On a yearly basis, Cross Company management makes a presentation to the Board of Directors regarding the proposed ESOP contribution. The Board of Directors looks at Cross Company’s financial results, performance to budget, and projections for the remainder of the fiscal year. Based on these (and other factors), the Board of Directors authorizes a contribution level to the employees for the year.
The employee benefits of the ESOP.
This contribution is a percentage of each employees ‘eligible wages’ for that year. The amount is received in cash or stock. The value of the stock is determined yearly by independent stock evaluators and the year end audit.
As years go by, the numbers of shares in an employee’s ESOP account grows by the annual contribution determined by the Board of Directors. Also as the value of the company goes up or down the value of the shares changes accordingly. The ESOP is meant to be a long term benefit plan and part of your retirement assets.