Benefits and Drawbacks of Employee Stock Ownership Plans

Have you ever heard of employee stock ownership plans? This is a concept that is also sometimes referred to as employee share ownership. Essentially, what it amounts to is …

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Have you ever heard of employee stock ownership plans? This is a concept that is also sometimes referred to as employee share ownership. Essentially, what it amounts to is that a company’s employees own shares in the business in which they work.

The way employees determine how many shares they are due is through benchmarks like how long they have worked for the company, or how high up the food chain they are in terms of authority and importance. It is beneficial to own shares in your own company since that gives you the incentive to work hard and increase their value.

There are more than a few real benefits to having a stock ownership plan for a company. But are there any drawbacks? Let’s go over this concept in a little more detail.

Selective Plans

There are two versions of an employee stock ownership plan. They are:

  • All-employee plans
  • Selective plans

Typically, this second version is only made available to high-ranking company executives.

Now, you might feel as though having a selective plan as the method through which a company makes employee stock ownership available would be a positive thing. In general, it is. If you’re a company that’s hiring, then you can probably lure top-tier talent to your highly-skilled positions if you tempt them with employee stock ownership.

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There is one potential drawback, though, and it is this. If selective plans are the only form of employee stock ownership that a company makes available, it’s easy to see how the rank-and-file might feel excluded. This is a significant perk that you’re giving to the executives, but not the lower-level employees.

It follows that if you’re going to set up an employee stock ownership plan, you might want to go with the all-employee version. More stock would go to higher-paid, prominent executives, but at least this way, lower-level employees will feel included. This is the kind of action that encourages company loyalty.

Shares Can Be Allocated Annually

There are different formats that you might choose, as a company, when you’re distributing employee stock through an ownership plan. You might decide to do it:

  • Monthly
  • Quarterly
  • Yearly

Of these different options, yearly distribution is the most common. The reason for this is that if employees know that they’re not going to get their stock until they have been with the company for one year, or two years, or three, then they’re more likely to stick with that same company. They want that stock, and even if they’re considering jumping ship for another job, they might stick it out for that reason alone.

As part of a generous benefits package, employee stock ownership might mean the difference in keeping top-tier talent as well as attracting it. An employee knows that they can cash out that stock at the time that makes the most sense. Some reasons might be retirement, disability, or termination.

Entrepreneur tradingEmployees Can Use Them as an Exit Strategy

Many employees regard ESOPs as part of their exit strategy, especially when their career is winding down. For liquidity, it’s hard to beat ESOPs. You can cash them out all at once if you’re doing something like buying a new house, or bit by bit to pay for things like vacations, cars, etc.

Ownership Pride

There is also the aspect that if you own shares in your company, you could make the point that you are a part-owner of it. It’s true that if you’re a low-level employee, and the amount of stock you own is relatively limited, then you’re not exactly a kingpin. Still, it’s nice to say that you have a genuine interest in the company because you own a minority stake in it.

Are There Any Disadvantages?

While there are plenty of positive things you can say about ESOPs, there is one potential drawback worth mentioning. If you want your company to be a good candidate for this business model, then it should have the ability to produce consistent financial results.

For this to happen, you need to have a strong management team in place. The people in powerful positions need to understand the importance of the legacy that they are working to protect.

Without that framework, profits might fluctuate. If that happens, when an employee wants to use their stock as an exit strategy, they might find that they’re almost worthless.

Overall, there are more positive things to say about ESOPs than negative. That is why so many companies are using this model.


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