Employee Stock Ownership Plans (ESOPs) come in two main types, or categories: a stock bonus plan and a leveraged plan. Both include the establishment of a tax-exempt ESOP trust under the Internal Revenue Code. In case of the stock bonus plan, the ESOP funds receives from the organisation either stock or cash intended for the purchase of the company stock. The stock, distributed on the basis of salary level and seniority, is then kept in employees’ accounts, enabling them to sell it in the open market or back to the employer following their retirement or dismissal.
With a leveraged plan, “ESOP borrows money from a bank or other financial institution to purchase stock” (Bohlander & Snell, 2004, p. 452). The loan can be guaranteed with the help of the stock placed in ESOP account and is gradually repaid with tax-deductible contributions from the employer. Despite the risk associated with dependence on corporate stock, ESOPs also deliver employees and employers a number of benefits.
For employers, the benefits are primarily connected to the low cost of the contributions caused by tax incentives as the part of the earnings that is placed in ESOPs is exempt from taxation. On the psychological side, ESOPs promote loyalty to the employer as they put the employee’s financial well-being in dependence upon the survival and progress of the company and in this way contribute to their interest in its performance.
ESOP enthusiasts say also that these plans “increase productivity, improve employee-management relations, and promote economic justice” (Bohlander & Snell, 2004, p. 452). These advantages explain why a large number of companies have introduced ESOPs. These employers include the Chicago Tribune Company, Southwest Airlines, Roadway Services, and Cincinnati Bell. Recently, the Continental Bank also made the decision to change to ESOP plans.