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EMPLOYEE STOCK OWNERSHIP
Profit-sharing makes it possible for employees to reap financial rewards from the profits of the company. An Employee Stock Ownership Plan (ESOP) allows employees to become part owners in the company. Some people say an ESOP is the biggest gift any employer can give to employees. Undoubtedly it has been, particularly for employees in ESOP companies that became very successful. Many people in the United States have become rich or at least achieved a level of financial security that would have been impossible for them otherwise simply because they were lucky enough to work for an ESOP company. But an ESOP isn't a gift. Employees must earn the shares in the company they receive.
An ESOP can be provided in a public or privately held company. But because of numerous federal laws covering ESOPs, you absolutely must seek professional advice before setting up such a plan. In brief, under an ESOP, your company agrees to make a certain contribution each year in stock or cash to purchase stock to ESOP accounts of employees. The amount of the contribution each year is determined by the owners or board of directors of the company based upon company performance. After a certain number of years of service and/or when they retire, employees receive the stock in their account; they can retain it, sell it back to the company, or (often with certain restrictions) sell it to a third party.
The advantages of an ESOP to employees is that the stock in their account can become extremely valuable if the company does well. The advantage to the company is that it frequently does perform very well once employees realize that they are part owners. If you think about it, this only makes sense. You certainly work hard for your company at least partially because it belongs to you. Your financial future may depend upon your company's success. Why wouldn't most employees respond the same way if they could have some ownership? Obviously, you give up some ownership, but if by your doing so the company is more successful, everyone benefits. Additionally, there may be some significant tax advantage that will flow to you and/or your company from installing an ESOP. Check with your accountant.
These suggestions for how to pay your employees represent new and innovative approaches to employee compensation. Not all of them will be right for your company. And you shouldn't adopt any changes in compensation practices without first doing a considerable amount of research and planning. Do consider what we have suggested, however. You may not be able to get "a fair day's work for a fair day's pay" anymore, but you just might get extraordinary performance from your employees if you are willing to share the financial rewards.
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