Thursday, 12 December 2013 15:12

What is an ESOP?

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In the beginning it is impossible not to note that the inventor of ESOP was Louis Kelso, author of "Democracy and economic power”.

An Employee Stock Ownership Plan (ESOP) is an employee benefit plan which makes the employees of a company owners of stock in that company. Several features make ESOPs unique as compared to other employee benefit plans. First, only an ESOP is required by law to invest primarily in the securities of the sponsoring employer. Second, an ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, "leveraged ESOPs" may be used as a technique of corporate finance.1

The key aspect is that employees have an ownership stake in the company they work for, and share in the risks and rewards that accrue to it.2

Almost unknown until 1974, about 11,000 companies now have these plans, covering over 13 million employees.3

According to Fortune Magazine’s 1997 "Best 100 Companies in America to Work For", about one third of these companies had 10% or more of their shares owned by employees. These include successful companies such as Microsoft, Hewlett-Packard, Procter & Gamble, Cisco, Intel, Xerox, Motorola and Merrill Lynch.4

As for efficiency, Canadian studies conducted by Toronto Stock Exchange are eloquent. It comparing ESOP versus non-ESOP public companies. For ESOP companies:

·         Five-year profit growth was 123% higher;

·         Net profit margin was 95% higher;

·         Productivity measured by revenue per employee was 24% higher;

·         Return on average total equity was 92.3% higher;

·         Return on capital was 65.5% higher.2

Sources:

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