The Employee Stock Ownership Plan (ESOP) is designed to be a retirement strategy predominantly for employees, but it is one that benefits the employer as well. Essentially, the ESOP provides an employee with ownership interest in the company he or she works for. The plan is funded through tax-deductible contributions from the employer. The advantages for the employee may be especially easy to identify, but there are several reasons an ESOP is beneficial for the employer as well.

With so much competition across all industries, especially with today’s consumer’s ability to utilize the Internet, it’s paramount for companies to stand about above the crowd. How do they do this? First, they have to provide a good or service that people want and need. Then there’s everything from pricing to marketing, branding to customer satisfaction. And you can’t forget about exceptional customer service. Your business-owning client can have the most amazing product in the world, but if a user’s experience is terrible, it won’t sell much.

For top-notch customer service, marketing that blows the competition away, and the most up-to-date and advanced tracking, business owners must have the best of the best when it comes to employees. But once they get them, they have to retain them too. Many have figured this out already and are looking to grow.

One way to achieve growth is to get employees to buy into the bottom line.  If the team has bought in, it’ll be more productive as a whole.

An Employee Stock Ownership Plan can increase the buy in. The employer provides this retirement plan to his or her employees. The employees own stock in the company; they want this asset to increase. Stock increases as the company finds more success and grows. Because there is a direct correlation between performance and company success, hypothetically, they will now be strongly motivated to be more productive. Their strong production, customer service, marketing brilliance, and more, leads to increased success and revenue for the company, which is a win for the business owner, a win for the business’ stock owners (the employees), a win for the consumers who make purchases from the business; it’s a win for everyone involved (even the broker who suggested the ESOP in the first place). One study in 2000 by Rutgers University proves this to be true, finding that companies with an ESOP in place grow at a rate of almost 2.5 percent faster than companies without.

Let’s take a deeper look at the advantages for both sides.

For the employee:

  • Employee owns stock in the company. The stock market can be tricky to track, but employees have a direct hand in the success or failure of a company and thus have insight to their stock’s performance.
  • Building of a retirement fund through company contributions. A 1997 study done by Washington State University found that employees of a company participating in an ESOP increased their retirement funds by up to 300 percent.
  • Value of ESOP account is not taxable to employee.
  • Flexibility to diversify portion of ESOP account (dependent upon certain age and experience requirements).

For the employer:

  • Provides a unique way to attract, reward, and retain top employees.
  • Increases cash flow—company contributes to ESOP through stock instead of cash.
  • Contributions are fully tax deductible.
  • Employer can fund principal and interest payments with pre-tax dollars.
  • Higher employee morale and increased job satisfaction
  • Higher employee retention
  • Increased production

The Employee Stock Option Plan does not work for all companies across the board. It is suggested that business-owning clients with strong cash flow and clearly identified growth in sales and profits take advantage of this method. This strategy works best for companies who possess stockholder equity, are in a high federal income tax bracket, and have identified employees who can effectively transition to management roles upon a key employee’s retirement.

Employees become stockholders in the company they work so hard to grow. Employers retain top employees with a unique reward and increase their revenues at the same time. This is a fantastic resource for retirement planning for both parties, too. Early planning is always good, and for any client no matter their stature or goal. And an ESOP provides an effective exit strategy for a departing owner as well, continuing to earn from company profits in retirement while successfully passing the business on to someone else for leadership.

Not sure if an ESOP is right for your business-owning client? Here is a great resource to find out. Or you can give us a call at (800) 823-4852.