Asked by Charles Jackson on Jul 15, 2024
Verified
Explain how employee stock ownership plans (ESOPs) differ from stock options.
Employee Stock Ownership Plans
Programs that allow employees to own shares in the company they work for, often aimed at aligning the interests of employees and shareholders.
Stock Options
Financial incentives given to employees, granting them the right to buy the company's stock at a set price in the future, typically aimed at aligning their interests with the company's performance.
- Distinguish between stock options and employee stock ownership plans (ESOPs).
Verified Answer
ESOPs are more common and usually have broader eligibility to a larger group of employees. They carry more risk for employees since an ESOP must invest at least 51 percent of assets in the company's stock. Problems with the company's performance therefore can take away significant value from the ESOP. Many companies set up ESOPs to hold retirement funds, so these risks directly affect employees' retirement income. Adding to the risk, funds in an ESOP are not guaranteed by the Pension Benefit Guarantee Corporation. Finally, employees sometimes use an ESOP to buy their company when it is experiencing financial problems. Still, ESOPs can be attractive to employers. Along with tax and financing advantages, ESOPs give employers a way to build pride in and commitment to the organization. Employees have a right to participate in votes by shareholders (if the stock is registered on a national exchange), meaning that employees participate somewhat in corporate-level decision making. Research suggests that the benefits of ESOPs are greatest when employee participation is high.
Learning Objectives
- Distinguish between stock options and employee stock ownership plans (ESOPs).
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