Esop Advantage And Dis Advantage

ESOP CONCEPTS ADVANTAGES AND DISADVANTAGES

By:Prabhat

meaning • An employee stock ownership plan (ESOP) is a way in which employees of a company can own a share of the company they work for. • The main purpose of an ESOP is to reward and motivate employees • In most cases, an ESOP is given to an employee, rather than purchased by an employee

• An ESOP is similar to a profit-sharing plan. A company sets up a trust fund, into which it contributes either new shares of its own stocks or cash to buy existing shares • Shares in the trust are generally allocated to individual employee accounts. • All employees over the age of 21 can participate in the plan

• When employees leave the company, they receives their share options, and the company must be able to buy back these options • They must buy them back at their full market value.

Advantages • Motivate employees to become more productive •Align employees' interests with those of shareholders • Recruit or retain key employees • Compensate for lower salaries and relieve pressure on cash flow • Remunerate employees in a tax-efficient way • Increase loyalty and reduce staff turnover • Raise working capital

Disadvantages • Effect on morale and retention if the share price falls • Administration costs - short-term costs of drawing up and getting a scheme approved, plus long-term costs of managing the scheme and keeping records. • Dilution of share ownership - as more shares are issued each share you own becomes a smaller percentage of the company - you could lose control of the business

• Risks of arousing unrealistic expectations among employees of the financial rewards. • Non permanent

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