Employee Stock Ownership Plans (ESOPs) are known for their benefits for business owners who are in the midst of succession planning, but they also can be very beneficial for employees. Here’s an overview of how ESOPs work and how they may benefit your employees.
How does an ESOP work?
An ESOP is a qualified benefit plan in which the business owners have sold some or all of their shares to an ESOP trust. This trust owns the shares on behalf of the employees, providing beneficial ownership of the company to all qualified employees of the company. As a business grows, so does the value of the shares allocated to employees. This creates a direct connection between the business’s success and the employee’s financial benefit.
How do employees benefit from ESOPs?
Employees benefit from ESOPs in three main ways: they gain retirement benefits, they feel a sense of job security, and they feel more engaged and committed to their company’s success.
ESOPs are a form of qualified benefit plan, much like a 401(k). However, one major difference and advantage over traditional retirement for employees is that they do not contribute their own funds toward the retirement plan. Instead, contributions come from the employer and employees accumulate the savings on a vesting schedule.
A private owner selling their company to an ESOP enables the company to go through less turmoil during the transition and not let go many of its employees, compared to mergers and acquisitions. The company continues to be managed and run like it was before the ESOP transition, which ultimately causes much less disruption if any at all.
Future sustainability of the company is especially important to employees during times of crisis, like in 2020. During a troubling economy, employees at private and publicly held companies experience much higher rates of layoffs compared to employees of an ESOP. Reasons for this include employers having to pay employees out at the time of termination and a stronger company culture that helps the business push through tough times.
Employees feel more committed to their company
The most obvious benefits of ESOPs are the loyalty, commitment and satisfaction employees feel. When employees have a stake in the company’s performance and profits, they are typically more motivated to do what’s best for the company. Employees feel an elevated responsibility toward their company, which motivates them to actively participate in company decision making. This is of course a major benefit for both the employee and the employer!
With the benefits both business owners and employees experience with an ESOP, it’s no surprise ESOPs become such a popular succession planning option. If you’re considering transitioning your business to an ESOP, get in touch with our Bankers Trust’s ESOP Finance team and learn about their high-touch approach to helping companies prepare for structural change and growth.