Employee Stock Ownership Plan (ESOP)

Definition

In general, a qualified, defined contribution, employee benefit plan designed to invest primarily in the stock of the sponsoring employer. To clarify, ESOPs are “qualified” in the sense that the ESOP’s sponsoring company, the selling shareholder, and participants receive various tax benefits. ESOPs are often used as a corporate finance strategy or as a business succession strategy and are also used to align the interests of a company’s employees with those of the company’s shareholders.

Explanation

In short, employee stock ownership plans can keep plan participants focused on company performance and share price appreciation. By giving plan participants an interest in seeing that the company’s stock performs well, these plans are believed to encourage participants to do what’s best for shareholders, since the participants themselves are shareholders.

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