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shares in their company as part of their salary. An Employee Share Option Plan (ESOP)[1] is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for. It is an equity based deferred compensation plan. Under the ESOP plan, companies provide their employees the opportunity to acquire the company's shares at a reduced price over a period of time.
Contents
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1 Varieties 2 Performance 3 Benefits to employees 4 Disadvantages to employees 5 Accounting for ESOPs 6 Stock Options and Related Plans 7 See also 8 Notes 9 References
[edit] Varieties
There are a variety of mechanisms for employee ownership: 1. Direct purchase plans simply allow employees to buy shares in the company with their own, usually after-tax, money. In the U.S. and several foreign countries, there are special tax-qualified plans, however, that allow employees to buy stock either at a discount or with matching shares from the company. For instance, in the U.S., employees can put aside after-tax pay over some period of time (typically 612 months) then use the accumulated funds to buy shares at up to a 15% discount at either the price at the time of purchase or the time when they started putting aside the money, whichever is lower. In the U.K. employee purchases can be matched directly by the company. 2. In the U.S., the most important kind of employee ownership is an ESOP (employee stock ownership plan), a kind of employee benefit plan under U.S. retirement law. ESOPs were given a specific statutory framework in 1974. Like other tax-qualified deferred compensation plans, they must not discriminate in their operations in favor of highly compensated employees, officers, or owners. In an ESOP, a company sets up an employee benefit trust, which it funds by contributing cash to buy company stock, contributing shares directly, or having the trust borrow money to buy stock, with the company making contributions to the plan to enable it to repay the loan. Generally, at least all full-time employees with a year or more of service are in the plan. 3. Stock options give employees the right to buy a number of shares at a price fixed at grant for a defined number of years into the future. Options, and all the plans listed
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below, can be given to any employee under whatever rules the company creates, with limited exceptions in various countries. Restricted stock and its close relative restricted stock units give employees the right to acquire or receive shares, by gift or purchase, once certain restrictions, such as working a certain number of years or meeting a performance target, are met. Phantom stock pays a future cash bonus equal to the value of a certain number of shares. Stock appreciation rights provide the right to the increase in the value of a designated number of shares, usually paid in cash but occasionally settled in shares (this is called a stocksettled SAR). Worker cooperatives are very different from the above mechanisms. They require members to join. Each worker-member buy a membership interest at a fixed price, or buys a share. Only workers can be members, but cooperative can hire non-worker owners. Each member gets one vote.
The tax rules for employee ownership vary widely from country to country. Only a few, most notably the U.S. Ireland, and the UK, have significant tax laws to encourage broad-based employee ownership.[2]
[edit] Performance
Employee ownership appears to increase production and profitability, and improve employees' dedication and sense of ownership.[3][4][5][6] Rosen, C., Case, J., Staubus, M., (2005) Equity: Why Employee Ownership Is Good for America, Harvard Business School Press. The key variable in making it work is a high degree of involvement in work-level decisions (employee teams, instance). Involvement in governance has no consistent effect, and some have argued that democratic leadership can lead to slow decision-making. Employee stock ownership can increase the employees financial risk if the company does poorly.,[7] but the data from ESOPs in the U.S. show that ESOP participants have three times the total retirement assets (including 401(k) plans) as comparable employees in non-ESOP companies and have diversified holdings at least as large.[8] Notable employee-owned corporations include the John Lewis Partnership retailers in the UK, and the United States the 150,000 employee supermarket chain Publix Supermarkets. The most celebrated (and studied) case of a multinational corporation based wholly on worker-ownership principles is the Mondragon Cooperative Corporation.[9] Unlike in the United States, however, Spanish law requires that members of the Mondragon Corporation are registered as self-employed. This differentiates co-operative ownership (in which selfemployed owner-members each have one voting share, or shares are controlled by a cooperative legal entity) from employee ownership (where ownership is typically held as a block of shares on behalf of employees using an Employee Benefit Trust, or company rules embed mechanisms for distributing shares to employees and ensuring they remain majority shareholders).[10][11] Different forms of employee ownership, and the principles that underlie them,[12] are strongly associated with the emergence of an international social enterprise movement. Key agents of employee ownership, such as Co-operatives UK and the Employee Ownership Association (EOA), play an active role in promoting employee ownership as a de facto standard for the development of social enterprises.[13]
Most features of employee-owned corporations described in this article are not specific to any one nation. The information on taxation and stock trading refers to United States law and may differ elsewhere.[14]
Diversification has been cited as an issue, and there are examples to support this belief. Employees at companies such as Enron and WorldCom lost much of their retirement savings by over-investing in company stock in their 401(k) plans, though these specific companies were not employee-owned. Studies in Massachusetts, Ohio, and Washington state, however, show that, on average, employees participating in the main form of employee ownership, employee stock ownership plans (ESOPs), have considerably more in retirement assets than comparable employees in non-ESOP firms. The most comprehensive of the studies, a report on all ESOP firms in Washington state, found that the retirement assets were about three times as great, and the diversified portion of employee retirement plans was about the same as the total retirement assets of comparable employees in equivalent non-ESOP firms. Wages in ESOP firms were also 5% to 12% higher. National data from Joseph Blasi and Douglas Kruse at Rutgers shows that ESOP companies are more successful than comparable firms and, perhaps as a result, were more likely to offer additional diversified retirement plans alongside their ESOPs. The data is also available at www.nceo.org. Employee ownership in 401(k) plans, however, is more problematic. About 17% of total 401(k) assets are invested in company stockmore in those companies that offer it as an option (although many do not). This may be an excessive concentration in a plan specifically meant to be for retirement security. In contrast, it may not be a serious problem for an ESOP or other options, which are meant as wealth building tools, preferably to exist alongside other plans. Detailed data on 401(k) plan investments are available at www.ebri.org, the home page of the Employee Benefits Research Institute.