If you have ever read how to motivate your employees, one of the first options that come up is ESOP. Letting your employees enjoy the benefits of stock ownership increases their loyalty towards the work. We have realized the benefits of Employee stock ownership plan over the years. Companies that make use of Employee stock ownership plans have set an example in the market.
Not just the loyalty but Employee Stock Option Plan also helps in tax, enjoying the tax benefits. However, it has its own drawbacks which might not be visible at first glance.
A stock option or ownership plan is a kind of benefit that employees get in form of ownership to the companies ownership. This gives an employee the right to buy the stock of their own employer and enjoy the profit. This acts as an encouragement to the employees to increase their productivity at work.
In a closely held employees also use it as succession planning. Since these plans are mostly made available to employees at an executive position. The main objective of ESOP is to make the employees more interested in seeing the company perform well.
The companies set a limit on how much ownership an employee can hold. Normally, companies limited the number of shares or percentage of capital in such cases.
There are various ways in which stock ownership is held by employees. The most commonly seen are:
This is one of the stock option plans where the employee can invest their own money in the shares of the company. The best thing about this plan is that employees can enjoy tax benefits in some cases. For instance, in the USA, employees can save their salary for up to 12 months and use it to buy shares with a tax-exempt.
This is another way a company can let their employees buy the shares to a certain limitation. The rules are different from company to company.
A restricted stock option is when a company allows the employee to own the shares but only after fulfilling certain restrictions. An example of a restriction could be the number of years worked in a company.
As the name suggests, phantom stock is an illusionary share. With this share, an employee can enjoy a cash prize at the end of the agreement. This employee stock ownership plan benefits the employee in cash rather than in stock.
The cash prize will be equivalent to the profit of an employee that he/she would have earned if incase the company share price was doing well. Similarly, if the company is in loss the cash price would be lesser.
This is another employee benefit plan which is received in cash form if there is any appreciation in the stock price.
The examples of benefits associated with employee stock ownership plans are as follow:
An employee stock ownership option is great and has considerable benefits. There is no denying of the merits. However, there are certain drawbacks linked to the employee-owned company shares plans. The major issues are: