Employee stock-ownership plan (ESOP)

Employee stock-ownership plans (ESOPs) are programs where a corporation contributes shares of the company’s stock into a trust, which then allocates the stock to employee accounts within the trust.
Shares are typically allocated in proportion to compensation and employees usually begin receiving allocations after one year of service, the shares must vest, meaning the employees become entitled to the shares, before the employee can choose to diversify his or her account. By law, vesting must occur within seven years of service, but many companies vest empolyees within shorter waiting periods. Employees waiting receive the vested portion of their accounts at termination, disability, death, or retirement. In publicly traded companies employees may sell their distributed shares on the market. In privately held firms, the company must give employees an option to sell the stock to the company. In the United States, employee stock-ownership plans, created by the Employee Retirement Income Security Act of 1974, allow both publicly owned and closely held corporations to transfer ownership interest in the company to its employees.
ESOPs are typically used to buy the stock of a retiring owner in a privately held company and as an employee benefit or incentive plan.
Employees can also benefit from the creation of employee stock-ownership plans, which are often used to establish a pension plan and add incentives for workers. ESOP distributions and dividends are tax-deferred, and laws require financial disclosure to employees. Researchers have found that employee ownership heightens worker involvement and productivity. Drawbacks to employee stock-ownership plans include the cost of starting a plan, administrative expenses, and compliance with government regulations.